What Employers Need to Know About the Updated Overtime Rule

The Changing Overtime Landscape

The Department of Labor periodically updates the salary threshold for white-collar overtime exemptions under the Fair Labor Standards Act. These updates directly affect which employees qualify as exempt from overtime pay. Every employer needs to understand these thresholds, monitor regulatory changes, and be prepared to adjust classifications when new rules take effect.

How the Salary Threshold Works

Under the FLSA, employees who meet both a minimum salary test and a duties test may be classified as exempt from overtime. The salary threshold sets the floor — employees earning below it are automatically eligible for overtime regardless of their duties.

When the DOL raises the threshold, employees who previously qualified as exempt based on their salary may fall below the new line. Employers must then either raise those employees' salaries above the new threshold or reclassify them as non-exempt and begin tracking their hours and paying overtime.

Preparing for Threshold Changes

Whether a new rule has just been finalized or is under consideration, the preparation steps are the same:

1. Identify Affected Employees

Pull a list of all currently exempt employees and compare their salaries to the anticipated new threshold. Employees earning between the current and proposed thresholds are directly affected. Sort them by how close their salary is to the new line.

2. Analyze Each Position

For each affected employee, you have three basic options:

• Raise the salary to meet or exceed the new threshold, preserving the exempt classification. This makes sense for employees whose salary is close to the threshold and who regularly work overtime hours.
• Reclassify as non-exempt and pay overtime for hours over 40 per week. This may be appropriate if the employee rarely works overtime.
• Reclassify and restructure workload to limit overtime hours by redistributing work, adjusting schedules, or hiring additional staff.

3. Calculate the Cost of Each Option

For employees who regularly work overtime, calculate the cost of that overtime under reclassification versus the cost of a salary increase. For example, an employee earning $40,000 who works an average of five overtime hours per week would cost roughly $5,000 more per year in overtime. Raising the salary to meet a new threshold might cost less.

4. Update Time-Tracking Systems

Newly non-exempt employees will need to track their hours. Ensure your timekeeping system can accommodate additional hourly employees. Train those employees and their supervisors on time-recording requirements.

5. Communicate Thoughtfully

Reclassification can feel like a demotion to affected employees, even though it is a legal compliance action. Communicate proactively:

• Explain that the change is required by law, not a reflection of the employee's value
• Describe any changes to how they will record time
• Clarify their pay rate and how overtime will be calculated
• Emphasize that their total compensation should remain the same or increase

Compensation Compression

Threshold increases can create compression problems. If you raise an employee's salary to the new exempt threshold, they may end up earning close to or more than employees in higher-level positions. Review your entire salary structure, not just the affected positions, to maintain internal equity.

State-Level Considerations

Some states have their own salary thresholds for overtime exemptions that may be higher than the federal level. California, New York, Washington, and Colorado have all set or are phasing in higher state thresholds. Employers in these states must comply with whichever threshold — state or federal — is more favorable to the employee.

Ongoing Compliance

Regardless of when the next threshold change takes effect, these practices will keep you prepared:

• Maintain accurate, current job descriptions that reflect actual duties
• Document the basis for each exempt classification
• Conduct an annual review of all exempt positions against both salary and duties tests
• Monitor DOL rulemaking activity and state-level legislative developments

Overtime compliance is not a one-time exercise. It requires ongoing attention to regulatory changes and honest evaluation of how each position is classified.