Understanding the new rules for Overtime-Exempt status employees

In April 2024, the US Department of Labor (DOL) released new rules regarding overtime-exempt salary pay for employees.

This applies to the majority of professional and office workers who receive a fixed salary each pay period, with no extra payment for overtime hours. The recent changes to overtime-exempt status have increased the minimum salary requirement from about $44,000 to $58,000 by 2025, with potential penalties for non-compliance.

To provide clarity to the new overtime-exempt status rules, we sat down with Client Accounting Services (CAS) Senior Manager Roxanne Sexton who provided greater understanding for businesses with employees who may fall within this threshold.

What is overtime-exempt status?

Employees who hold overtime-exempt status may be paid weekly, bi-weekly, or monthly, but they are not paid overtime due to the nature of their position or the service they provide to a business for working extra hours. Their salaries are generally predetermined and at a fixed pay rate. Employees and employers understand the fixed pay rate regardless of whether they perform 35 or 40 hours a week.

If an employee is not meeting the standard agreement terms that were set, an employer could renegotiate and switch the employee from hourly to salary. For the employee’s salary to be considered overtime-exempt, there has to be a minimum salary for it to be considered fair. If an employee is missing out on overtime pay, it needs to be worth it from the employee’s perspective. The difference between hourly versus salary is pay structure.

Roxanne Sexton, Client Accounting Services (CAS) Senior Manager

What businesses or service areas generally have employees that qualify for overtime-exempt status?

These employees fall into various categories such as:

Officers or executives of an organization
Clerical employees
Marketing positions
Accounting positions
Retail workers
Healthcare workers

Are contract employees similar to overtime-exempt employees?

Not necessarily. Contract employees are brought in from outside your company or business to do a service and are paid based on short-term employment. Overtime-exempt employees are actual employees of your company or firm, and their normal compensation is for long-term employment.

Why is it important businesses understand the new rules set by the U.S. Department of Labor?

The new rules, which kicked in on July 1, 2024, increased the minimum salary for overtime-exempt workers to $43,888 annually. A second increase is scheduled for January 1, 2025, which will raise the minimum salary to $58,656 annually. That’s a huge jump that could have a major impact on some companies and their employees.

With inflation climbing over the past several years, that has increased the (overtime-exempt) salaries to a certain extent. Because the rules and guidelines for minimum salaries had not changed in years, salaries had not been keeping up with the pace of inflation in many areas. That’s why the DOL has stepped up to modify the rules to make it a fairer trade-off if employees have to forego overtime pay.

On the flip side, there are employers that may choose to just put their employees back on hourly pay rather than pay them a higher salary. So, we may see some changes there, because of the environment of what is considered a reasonable base pay for a lot of jobs. It’s been increasing over these past few years. This is resetting the status to what’s considered a living wage and what’s a base pay. 20 years ago, $35,000 was a pretty decent living. Now, it’s pretty far down. It may not be enough to pay the bills for a family.

What should business owners take into consideration with the new rules set for overtime-exempt status from the DOL?

Business owners should start considering the following:

Assess all annual salaries of employees: Business owners should check to see if they have any employees under the upcoming July 1, 2025, minimum salary of $58,656. If all the employees currently meet that minimum – then no changes will be required to stay in compliance. For any employees who are making between $445 and $58k per year – they are in the range where they will need to have their pay updated before January 2025.
Consider the actual hours employees are working. For your employees who receive salaries in the range of $44k to $58k, you should consider how much overtime they are working in an average week. This will help you determine whether you are better off raising their salary or switching them back to hourly pay plus overtime.
Look out for any employees who are receiving a salary of less than $44,000 annually. The minimum salary increased on July 1, 2024, to $43,888 – if you have employees who are making below this amount in salary, you are not in compliance with labor law. You could face penalties, on both the state and federal level, such as fines of up to $1,000 per violation. You should update pay rates for the affected employees immediately to get back in compliance, either by raising their salary above the minimum or converting to hourly pay plus overtime.