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Department of Labor Finalizes Changes to Federal Overtime Law

On April 23, 2024, the Department of Labor (DOL) finalized its regulation entitled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” covering exemptions from the Fair Labor Standard Act’s (FLSA’s) minimum wage and overtime regulations. On the final rule’s implementation date of July 1, 2024, 3.6 million additional workers will be covered under the FLSA’s overtime protections.

The final rule increases the standard salary level as well as the highly compensated employee (HCE) total annual compensation threshold. The standard salary level and HCE total annual compensation threshold will each increase on a schedule through 2027, when DOL will recalculate both standards.

Main Provisions

  • Starting July 1, 2024, the current overtime salary threshold would be raised from $684 a week, or $35,568 per year, to $844 per week, equivalent to $43,888 per year. This so-called “white collar” exemption includes executive, administrative, professional, and outside sales professionals.
  • On January 1, 2025, the overtime salary threshold will again be raised to $1,128 per week, equivalent to $58,656 per year.
  • The salary threshold would be automatically updated every three years beginning July 1, 2027, based on current earnings data.
  • On July 1, 2024, the earnings threshold for the HCE exemption would be increased from $107,432 to $132,964. In 2025, the threshold would once again be raised to $151,164 a year.

National Club Association Outlook

With the first changes scheduled for July of this year, employers will need to move quickly to assess the classification status of their workers. As with previous attempts to expand overtime requirements, we expect this regulation to face a legal challenge before it is implemented.

In the final rule, DOL clarified that it set the salary level using earnings data from a lower-salary regional data set (as opposed to nationwide data) to accommodate businesses for which salaries generally are lower due to geographic or industry-specific reasons. As such,

the proposed rule does not explicitly consider any geographic differences, such as the cost of living, in its calculation of data used to update the overtime salary threshold.

Under the proposed rule, there will be no changes to how bonuses are counted towards the minimum-salary level requirement. Under current rules, only 10 percent of bonuses and commissions can count toward the minimum threshold. There will also be no changes to existing job duties requirements.

There are limited options to comply with the proposed rule. One way would be to give employees whose salary is right below the threshold a raise to reestablish themselves back into exempt status. Staffing levels can be managed to avoid excessive overtime payments. However, current labor shortages would make it increasingly challenging to recruit part-time workers necessary for filling any scheduling gaps.

The implementation of the final rule as written is unclear. On June 28, 2024, a federal judge for the U.S. District Court of the Eastern District of Texas on Friday granted the state of Texas’ request for an injunction that would temporarily block implementation of the Department of Labor’s (DOL) final overtime rule. The emergency relief is limited to the state of Texas as an employer only while the court hears an underlying legal challenge.

Texas, who brought forth this case against DOL, argued the FLSA requires the federal government to consider if a person is salaried and if they hold a bona fide executive, administrative or professional position–an analysis known as the “duties test.” The state alleged that DOL improperly created a “salary only” test to determine who is required to receive overtime pay.

The argument made by Texas in this case and in two others challenging the rule is supported by precedent. In 2016, a different federal judge in the Eastern District of Texas struck down a nearly identical rule created by President Obama’s Department of Labor. The judge in that case ruled that the Department of Labor erred in only considering salary for determining overtime eligibility. Given that precedent, the National Club Association submitted comments to the Department of Labor about the Biden administration’s proposed rule when it was released last year. NCA raised concern that DOL once again neglected the duties test and informed the agency of the financial burden this new rule would place on private clubs.

The Texas lawsuit is one of three federal court challenges to the DOL final rule, including another one filed on May 22 in the Eastern District of Texas by more than a dozen business groups led by the Plano Chamber of Commerce. In that lawsuit, the plaintiffs alleged that

the final overtime rule exceeded DOL’s legal authority under the FLSA and that the automatic updates to the salary threshold every three years would violate notice and comment requirements under the Administrative Procedure Act, which governs the process by which federal agencies develop and issue regulations. In addition to the preliminary injunction, the judge in the state of Texas case consolidated the lawsuit with the May 22 challenge.

The third challenge was filed by software company Flint Avenue LLC in the Northern District of Texas. The federal judge overseeing that case denied the plaintiff’s request for a preliminary injunction of the final overtime rule, arguing that Flint Avenue failed to meet its burden of showing irreparable harm that would justify the remedy of injunctive relief to stop the July 1, 2024 provision from taking effect.