A variety of business groups have been filing lawsuits to stop the Department of Labor's overtime rule, which was finalized in late April and is set to go into effect on July 1.
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Starting July 1, most salaried workers who earn under $844 per week, or $43,888 per year, will become eligible for overtime pay under the new rule, and on Jan. 1, 2025, most salaried workers who make under $1,128 per week, or $58,656 per year, will become eligible for overtime pay. Currently the level is $684 per week, or $35,568 per year. Nevertheless, job duties will continue to determine overtime exemption status for most salaried employees. Still,
A number of business groups filed suit against the rule in Texas last month, including the American Hotel and Lodging Association, Associated Builders and Contractors, the International Franchise Association, the National Association of Convenience Stores, the National Association of Home Builders, the National Association of Wholesale Distributors, the National Federation of Independent Business, the National Retail Federation, the Restaurant Law Center, the Texas Restaurant Association, Cooper General Contractors and Dase Blinds. More recently, Texas Attorney General Ken Paxton filed a lawsuit last week, as did the New Civil Liberties Alliance.
The Biden administration rule revives an effort to expand overtime eligibility that had been proposed under the Obama administration that was scuttled by the courts before the salary level was raised from $23,660 to $35,568 during the Trump administration. The new rule would raise that to $58,656.
"It goes to $844 per week July 1, and then it even goes beyond the Obama era proposal that was at $913 per week, and now it will take it on Jan. 1 2025, to $1,128 per week," said Margaret Ferrero, vice president and assistant general counsel at payroll giant ADP. "When they first proposed the rule, they put it at somewhere right around a $50,000 level, but they indicated in the proposal that it wasn't a set number."
The rule will apply to people who work more than 40 hours a week, so some employers may respond by limiting the number of hours they assign to workers, splitting shifts or hiring more people in a part-time capacity.
"The intent is really to ensure that workers are paid a living wage for all the time that they work," said Ferrero. "In the Department of Labor, under any administration, the idea is that all employees are nonexempt until proven otherwise."
Many people would still be exempted from the new rule if they work in an executive position carrying out management duties, and have a high enough salary. There are executive, administrative and professional exemptions, as well as a salary threshold.
To fall within the so-called EAP exemption, an employee generally must meet three tests:
- Be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed;
- Be paid at least a specified weekly salary level; and,
- Primarily perform executive, administrative, or professional duties, as provided in the department's regulations.
The department's regulations also provide an alternative test for certain highly compensated employees who are paid a salary, earn above a higher total annual compensation level, and satisfy a minimal duties test.
"I have to be doing duties that fall within those exemptions in order to be considered to be exempt," said Ferrero. "Oftentimes employers will look at the salary component and then they have to also consider the duties component. When you think about the new role, the idea is that those individuals who may have been earning a salary and could fall into an exemption based on their duties, either employers will want to look at their salary and determine does it make sense for me to increase their salary to meet the new salary threshold or should I consider them to be nonexempt and pay them on an hourly basis and then pay them overtime if they work it."
"Employers are going to want to make sure that they've got clear workplace policies around how they manage overtime hours: requiring that employees get approval prior to working," she continued. "But note that even if an employee does not get approval, but works the hours, the employer should still pay them for those hours, but can take action related to a violation of the policy if the person did not seek approval for working the overtime hours prior to working them."
Some employers may try to limit any overtime hours that people are working so as not to incur the additional pay. But they need to avoid making employees feel less valued from a change in status.
"There's a human side to the rule and things to consider because we find historically that you look at that distinction between exempt and nonexempt," said Ferrero. "To have your role go from an exempt status to a nonexempt status, sometimes people view that as almost a demotion, not recognizing the fact that really what that's about is that now you're entitled to overtime pay if you work in excess of 40 hours a week under the federal law. And so I think employers are going to want to make sure they take that into account as well, and how their employees are feeling from an engagement perspective if their FLSA classification is changed."
Employers will also need to decide how to treat the increasing number of employees who work remotely or in a hybrid arrangement.
"It definitely makes it more challenging," said Ferrero. "Employers are going to want to make sure that they have a couple ways for their employees to keep track of their time so that they can account for the time that an employee is working. So if you have a nonexempt employee who is working remote two days a week, you want to make sure they're either clocking in and out on their computer or they're clocking in and out on their phone, or they have some way to be able to track that time that will allow the employer to understand that they are working and also having clear rules around the fact that you expect them to clock in prior to starting work and to clock out once they're completed their work and not to work off hours."
Accountants who are involved with providing payroll services may also have some new responsibilities.
"As an accountant who is working with a small and midsized business, or even working inhouse at a larger company, one of the things that's going to be important for them to do is really to help either the owner or the manager evaluate who's falling now under that new threshold from a salary perspective and start to walk through the analysis," said Ferrero. "If you have this person who now falls below the salary threshold, how many hours is that person typically working on a weekly basis? And so if I make them an hourly employee, are they going to be incurring overtime on a regular basis because I need to keep up the same productivity? Or would it make sense to maybe hire another person who would also be nonexempt and paid on an hourly basis and manage the hours in that regard? ... The accountant's role is more around that financial analysis to really understand what the impact might be."
If there is a change in administration in Washington after the election, that could affect the new rule, as well as court rulings on the various lawsuits.
"If you look at history, we will see some judicial challenges to the rule," said Ferrero. "It's similar to what we saw last time when it was the Obama administration. There were lawsuits filed in multiple states that ended up going through the federal courts in Texas. But then it was the Trump administration that came in and issued the new Department of Labor rule that did increase the salary, just to a lower level. So from an administration perspective, it could be that we see some modification maybe to the levels, or maybe not. But I do think just from a judicial challenge perspective, we will likely see something, and you also have that case that is currently pending at the appeals level ... we may see it go up to the Supreme Court, where they will finally decide whether the Department of Labor has the right to even set salary thresholds."
She believes the rule will take effect this summer unless the court decides to pause it.
"Unless there's a challenge that stays it, I think it will take effect July 1, and we will see that salary increase to $844 a week. But if there's a judicial challenge before that has a request for a stay related to it, then it may not take effect until the case is resolved. I think it's going to depend on what the challenge looks like. I think employers have to plan, though. July 1 is going to be here before you know it."
