As the year comes to an end, businesses are preparing for the year-end review process, and compensation plans are top of mind. With potential raises, bonuses, and other incentives in the horizon, employers also need to address the U.S. Department of Labor’s (DOL) upcoming changes to overtime rules taking effect on January 1, 2025. These changes could significantly affect your compensation strategy for next year, so here are ten key steps for employers to consider as they navigate the new regulations.
- Focus on Compliance to Avoid Penalties
The Fair Labor Standards Act (FLSA) requires most employees to be paid overtime (1.5 times their regular rate) for hours worked beyond 40 in a week, unless they qualify for an exemption. To qualify for the “white-collar” exemptions (executive, administrative, professional), employees must meet a salary threshold. As of January 1, 2025, this threshold will rise from $43,888 to $58,656 per year.
In addition, the highly compensated employee (HCE) exemption threshold will increase to $151,164 annually from the current $132,964.
- Identify Employees Below the New Threshold
If employers have exempt team members earning less than $58,656, employers will need to decide whether to raise their salaries or reclassify them as non-exempt, which would make them eligible for overtime. In addition, reclassifying may require tracking hours worked, adjusting pay structures, and staying compliant with overtime regulations. Start tracking their hours now to understand the potential impact of this change.
- Consider Compensation Adjustments
If you choose to reclassify, you’ll need to consider how much to pay these employees. Should their hourly rate be based on their current weekly salary divided by 40 hours, or will you account for expected overtime? Overtime is calculated based on the employee’s regular rate of pay, which includes bonuses, commissions, and some non-cash payments.
- Address Morale Issues
Reclassifying employees from exempt to non-exempt status can affect morale, as many employees associate exempt status with prestige and flexibility. Set a communication plan to address concerns. It’s crucial to reassure employees that these changes are necessary to comply with federal regulations and ensure fair compensation.
- Notify Employees in Advance
Provide employees with written notice of any changes to their compensation and work responsibilities, including timekeeping and meal and rest breaks. Some states require advance notice of wage changes, so check your local laws to ensure compliance. Even if notice isn’t required, giving employees ample time to adjust is a good practice.
- Review Policies on Equipment and Devices
Exempt employees often have more flexibility in using company equipment and devices for work outside of normal hours. With reclassification, you may need to establish new guidelines for non-exempt employees regarding company laptops, smartphones, and reimbursement for expenses.
- Train Managers and Employees
To ensure a smooth transition, train both managers and newly classified non-exempt employees on the new rules on overtime approval processes, timekeeping procedures, and guidelines for meal and rest breaks. Proper training will help avoid misunderstandings and ensure compliance with the new regulations.
- Verify Exemptions with the Duties Test
In addition to meeting the salary threshold, exempt employees must satisfy certain duties requirements. Now is a good time to review job roles and descriptions to ensure they meet both the salary and duties tests for exemption under the FLSA. Job titles alone do not determine exemption status.
- Monitor Legal Developments
While legal challenges to the DOL’s overtime rule continue, the new threshold is scheduled to take effect on January 1, 2025. Currently, these rules apply to most employers, though there are ongoing court cases that could potentially delay or change the implementation. Stay updated on the developments, but also prepare as if the new rules will take effect on schedule.
- Consider State-Specific Laws
State wage and hour laws may impose stricter or different requirements than federal regulations. Some states have higher salary thresholds for exemptions, different overtime rules, or other wage-related provisions. Ensure your business complies with both federal and state laws to avoid potential legal issues.
As we approach 2025, the new overtime rule will play a critical role for many businesses. Employers should start preparing now to ensure compliance, minimize disruptions, and maintain employee morale. By following these ten steps, you can navigate the changes effectively and set your business up for a smooth transition into the new year. Clients can always reach out to us for with any questions on this topic.
