The Department of Labor’s new exempt salary threshold for workers goes into effect July 1. The effective date is approaching quickly, and employers need to be prepared for not only this immediate change but also ongoing, regular updates in the coming years.
Starting in July, most salaried workers earning less than $844 per week will become eligible for overtime pay under the final rule. And on Jan. 1, 2025, most salaried workers making less than $1,128 per week will become eligible for overtime pay.
To prepare for these changes, employers must consider five questions.
Are our job descriptions current; are we confident that our employees’ exemption statuses are accurate and meet the salary threshold, salary basis and job duties tests?
The change in salary thresholds is significant for employers, but the exempt or non-exempt classification of positions according to the job duties test is also critical. Because of this, the job description is really the foundation and starting point of the classification process. If job descriptions aren’t accurate and current, determining exempt or non-exempt status can be very difficult, and employers risk misclassifying positions.
The rules are complex, and employers must realize there may not be an easy answer. If the employer suspects they have issues with the classification of their positions, we recommend conducting their internal reviews under attorney-client privilege to protect the process and results.
What steps should we take to ensure compliance with the new regulations and to be prepared for additional changes in the future?
The first step is to look at the employee population and see which employees are potentially impacted based on their current compensation. Next, look at those affected individuals and validate their classification as exempt or non-exempt. This involves reviewing the job description and verifying that it accurately summarizes the position’s responsibilities. After that, employers can start evaluating the financial implications of raising salaries to at least meet the new threshold or leaving salaries as they are and reclassifying employees to non-exempt status. It’s not necessarily a one-size-fits-all approach when it comes to compensation. Every situation must be reviewed on a case-by-case basis, and decisions made depending on what will work best for the organization. For example, if you have an exempt employee and are confident that their job is classified properly but their base salary falls below the new threshold, you might need to reclassify them as non-exempt if financially it is not feasible to raise their salary to at least $844 per week. The change to non-exempt status also makes the employee eligible for overtime.
It should be noted that the salary threshold amounts do not include variable pay. However, if an employee is eligible for some type of variable pay, such as a bonus, short-term incentive or commission, employers can count 10 percent of that amount toward the salary threshold. There are other stipulations to this rule, but depending on the organization’s compensation structure, that 10 percent may bump the employee over the threshold.
As mentioned above, in some cases, employers may bump an employee’s pay over the new threshold to maintain their exempt status. However, for other employers, a pay increase might be financially impossible, and they may need to reclassify that employee as non-exempt. The decision becomes more complex when factoring overtime into the equation. For example, if an employer has an exempt employee consistently working 50 hours a week, but they know it is likely this individual will need to be re-classified as non-exempt, the employer should consider the efficiency of the individual performing the job. Does the job require 50 hours per week, or is the person in the role underperforming? Evaluate the workload and determine if additional resources are necessary to support them. This will potentially reduce overtime expenses, balance the workload or address a performance issue.
Have employers considered how increasing the salaries of certain exempt employees might impact their managers and/or peers in the organization?
This is a concern from both optics and actual pay levels. For example, if you have a manager who is just above the salary threshold and a supervisor who reports to that manager who is currently below the threshold, you could increase the supervisor’s salary to maintain their exempt status. However, that creates a problem by eliminating the distance between the manager’s and supervisor’s pay, resulting in salary compression. It can become difficult for an organization to maintain the historical separation of wages that generally occurs over time due to promotion, transfer or merit increases. Salary compression can significantly impact employee morale and lead to retention issues within the organization. A manager who leads a team of 10 supervisors who make only $1,000 less than the manager may feel unappreciated and look for employment elsewhere.
How are we tracking non-exempt employee hours worked, and will this practice still work under the new rules?
Time tracking of non-exempt employee hours will become more important than ever, but it can get tricky. For example, if an employer has an exempt employee who will be reclassified as non-exempt because their salary falls below the new threshold, their hours must be tracked and carefully monitored. Consider how often employees log off work for a few hours and log back online late at night. If this occurs outside the employee’s normal work hours, the time is still considered hours worked and must be tracked and compensated. The work could be an hour’s worth of emails or a phone call, but if handled after business hours, the employee must be paid for that time.
For some people, there’s a perceived value in being classified as an exempt employee. Positions generally have greater flexibility, and roles are often thought of at the professional level with specific perks. What employees don’t always consider is that their exempt status makes them ineligible for overtime. It doesn’t matter if they work 30 hours a week or 60 hours a week. They will be paid the same salary. For a non-exempt employee accustomed to earning overtime, that favorable perception of exempt classification can quickly fade. Employers must consider the financial implications of reclassifying a non-exempt employee to exempt status.
How will employees and management be notified of these changes?
Once employers have determined their strategy for addressing the DOL’s salary threshold changes, they need to determine how they will communicate these changes to the impacted employees. Many employers will utilize a written letter or email. Most employers will have an in-person meeting with affected employees one at a time, including their supervisor and human resources, to explain the changes. We recommend avoiding group communication tactics and holding personal conversations with the affected individuals instead. A final best practice is the establishment of a well-researched list of FAQs. This list of frequently asked questions and corresponding answers can be a useful internal resource document for organizational leaders, HR staff and supervisors as they have critical conversations with affected employees. The questions and answers should generally be written as a high-level overview without getting too deep into details. It is impossible to anticipate all questions that may be asked, but the individuals responsible for communications must not “shoot from the hip” during their conversations. Depending on the organization, the number of people affected, and the significance of the changes, supervisors must discern what information they choose to share with employees.
While communication is critical, it’s also important that employers don’t give too much detail, particularly about the classification process. It’s possible that some employees who are changed to a non-exempt status may think they “missed out on overtime” for years. Usually, when employees get a bump in pay, this is a non-issue. Either way, it’s a delicate communication balance for employers—they need to be transparent and make sure employees understand exactly how they are impacted without providing details that are not relevant or that could lead to questions the organization is not prepared to answer.
When considering these changes, employers must remember that their impacts don’t end in January 2025. Starting July 1, 2027, the salary thresholds will be updated every three years to keep pace with changes in worker salaries. As such, savvy employers must continue to lean forward as they thoughtfully navigate changes to the DOL rule that extends overtime protections to workers nationwide.
