The federal government has announced a significant increase in the salary threshold for overtime exemption, a move that is expected to have a major impact on employers and employees alike. The new threshold, which will take effect on January 1, 2025, will raise the minimum salary that must be paid to employees in order to be exempt from overtime pay from $455 per week to $679 per week. While this is a significant increase, it is still below the level that many advocates had been calling for, and it is unclear whether it will be enough to address the growing problem of overtime abuse.
The Department of Labor (DOL) is responsible for enforcing the Fair Labor Standards Act (FLSA), which sets the federal minimum wage and overtime pay requirements. The FLSA requires employers to pay overtime pay to employees who work more than 40 hours in a week, unless the employee is exempt from overtime. There are a number of exemptions to the overtime pay requirement, including the executive, administrative, and professional exemptions. The salary threshold for the executive, administrative, and professional exemptions has not been updated since 2004, and the DOL has been under pressure to increase the threshold for some time.
The new salary threshold is a compromise between the interests of employers and employees. Employers had argued that a higher salary threshold would make it more difficult to find and retain qualified employees, while employees had argued that the current threshold was too low and did not reflect the current cost of living. The DOL ultimately decided to set the new threshold at a level that it believes is fair and reasonable, and that will help to ensure that employees are paid fairly for their work. The DOL also noted that the new threshold is still below the salary threshold for the highly compensated employee exemption, which is currently set at $107,432 per year.
Implementing the New Federal Exempt Salary Threshold
Step 1: Determine Applicability
The Fair Labor Standards Act (FLSA) requires employers to pay nonexempt employees overtime pay for hours worked over 40 per week. However, certain employees are exempt from overtime pay requirements if they meet specific criteria, including a salary threshold. The new federal exempt salary threshold, effective January 1, 2025, is $62,400 per year. This means that employees with annual salaries at or above that level will generally be considered exempt from overtime pay.
To determine if an employee is exempt, employers must first consider the employee’s job duties. Exempt employees typically perform administrative, executive, or professional duties that require a high degree of independence and discretion. Employers should review job descriptions and consult with legal counsel to determine if an employee’s duties meet the criteria for exemption.
Once an employer has determined that an employee’s job duties meet the criteria for exemption, they must then consider the employee’s salary. The new exempt salary threshold of $62,400 per year is based on the 20th percentile of earnings for full-time salaried workers in the lowest-wage region of the country. This means that approximately 80% of full-time salaried workers in the lowest-wage region will earn above the new threshold.
The table below provides a summary of the new federal exempt salary threshold:
| Effective Date | Salary Threshold |
|---|---|
| January 1, 2025 | $62,400 per year |
Analyzing the Impact of the Increased Threshold
The increased federal exempt salary threshold is expected to have a significant impact on employers and employees alike. By raising the threshold, more workers will be eligible for overtime pay, potentially leading to increased labor costs for employers. Additionally, the new threshold could result in changes to job responsibilities and compensation structures.
Impact on Labor Costs
The most immediate impact of the increased threshold will be on labor costs. Employers will need to pay overtime pay to any employees who earn less than the new threshold and work more than 40 hours per week. This could lead to increased labor costs for employers, particularly those with a large number of low-wage workers. Some employers may also choose to reduce the number of hours that their employees work in order to avoid paying overtime.
Impact on Job Responsibilities
The increased threshold could also lead to changes in job responsibilities. Employers may be more likely to assign overtime work to employees who are not eligible for overtime pay. This could lead to those employees having to work longer hours and take on additional responsibilities. In some cases, employers may even create new positions to handle the additional workload created by the increased threshold.
Impact on Compensation Structures
The increased threshold could also have an impact on compensation structures. Employers may choose to increase the salaries of employees who are currently earning just below the new threshold in order to avoid having to pay them overtime. This could lead to a compression of wages for employees at the lower end of the pay scale. Some employers may also choose to implement new compensation structures that are not based on hours worked, such as performance-based pay or salary plus commission.
| Salary Threshold | Effective Date |
|---|---|
| $684 per week ($35,568 per year) | December 1, 2016 |
| $913 per week ($47,476 per year) | January 1, 2020 |
| $1,046 per week ($54,403 per year) | January 1, 2025 |
Compliance Considerations for Employers
1. Review and Analyze Current Workforce
Assess the current workforce to identify employees who fall below the revised threshold. Determine their job responsibilities, compensation, and any potential overtime eligibility.
2. Reclassify Exempt Employees as Non-Exempt
For employees deemed non-exempt under the new threshold, employers must reclassify them as hourly or salaried non-exempt employees. Ensure they are eligible for overtime pay and other benefits as applicable.
3. Salary Adjustments and Benefit Considerations
Based on the revised threshold, employers may consider adjusting salaries to ensure employees meet or exceed the new minimum. Additionally, review employee benefits such as paid time off, retirement plans, and insurance to ensure they align with the new wage levels.
Here’s a table summarizing key considerations for salary adjustments and benefits:
| Consideration | Action |
|---|---|
| Salary below revised threshold | Adjust salary to meet or exceed the new minimum |
| Overtime eligibility | Review job duties to determine overtime eligibility |
| Health insurance coverage | Ensure employees maintain health insurance coverage |
| Paid time off | Consider offering additional paid time off to compensate for any reduction in overtime pay |
| Retirement benefits | Review retirement plans to ensure they remain competitive |
Effects on Employee Classification and Payroll
Overtime Eligibility
Prior to the 2025 threshold increase, employees earning less than $47,476 per year were generally eligible for overtime pay when working more than 40 hours per week. With the new threshold, many employees earning up to $65,580 will no longer be eligible for overtime, impacting their earnings and work-life balance.
Independent Contractor Status
The increased threshold may lead to more employers misclassifying employees as independent contractors to avoid overtime and other employee benefits. This could have negative consequences for workers, as independent contractors often lack basic workplace protections, such as minimum wage, overtime pay, and health insurance.
Salary Compensation
In response to the threshold increase, some employers may adjust salaries to ensure that employees meet the new exempt criteria. This could lead to higher base pay for some employees, but it could also result in reduced overtime opportunities and overall compensation.
Payroll Administration
The new threshold will require employers to update their payroll systems to correctly classify employees and administer overtime. This administrative burden could be particularly challenging for companies with large workforces.
Example:
| Year | Salary Threshold | Overtime Eligible |
|---|---|---|
| 2022 | $35,568 | Employees earning less than $35,568 |
| 2023 | $38,000 | Employees earning less than $38,000 |
| 2024 | $44,172 | Employees earning less than $44,172 |
| 2025 | $65,580 | Employees earning less than $65,580 |
Ensuring Compliance with the New Threshold
Organizations should establish clear communication channels to inform employees about the changes in the salary threshold. This includes providing written notice and educating supervisors on their responsibilities in identifying and classifying exempt employees accurately. Regular audits and reviews should be conducted to ensure compliance and identify any potential misclassifications.
Impact on Recruitment and Hiring
The increased salary threshold may affect recruitment and hiring practices. Employers may need to adjust their salary ranges for certain positions to meet the new minimum. This may result in increased competition for qualified candidates and the need to explore alternative staffing models, such as contract work or part-time employment.
Training and Development
Organizations should provide training to enhance the skills and knowledge of exempt employees to ensure they meet the responsibilities and duties associated with the higher threshold. This may include leadership development, management training, and technical skill enhancement.
Compensation and Benefits Review
The implementation of the new threshold may require a review of compensation and benefits packages to ensure fairness and equity among employees. Employers should consider adjusting salaries for non-exempt employees to maintain pay differentials and avoid any potential wage compression.
Assessing the Impact on Exempt Employees: A Three-Step Approach
| Step | Action |
|---|---|
| 1 | Identify exempt employees who fall below the new threshold and assess their current job duties and responsibilities. |
| 2 | Determine whether any changes to job duties or responsibilities are necessary to maintain their exempt status. |
| 3 | Implement any necessary changes and provide training or development to ensure employees meet the revised requirements. |
FLSA Implications
Applicability of the FLSA
The FLSA’s minimum wage, overtime pay, and record-keeping requirements apply to employees covered by the Act. The FLSA’s coverage is broad and includes most employees, but there are certain exemptions, including the executive, administrative, professional, and outside sales exemptions.
Exemption from Overtime Pay
The FLSA’s overtime pay provisions require employers to pay employees overtime pay at a rate of one and one-half times their regular rate of pay for hours worked over 40 in a workweek. However, certain employees are exempt from the overtime pay requirements, including those who meet the duties test for the executive, administrative, professional, and outside sales exemptions.
Duties Test for Exempt Employees
To qualify for the executive, administrative, professional, or outside sales exemptions, employees must meet certain duties tests. These tests are designed to ensure that the employees are performing duties that are managerial, administrative, or professional in nature, or that they are outside sales personnel. The duties tests are complex and vary depending on the specific exemption. Employers should carefully review the duties of their employees to determine whether they meet the applicable duties test.
Salary Threshold for Exempt Employees
In addition to meeting the duties test, most exempt employees must also meet a salary threshold. The salary threshold is the minimum annual salary that an employee must be paid to be exempt from the overtime pay requirements. The salary threshold is updated periodically. As of 2023, the salary threshold for most exempt employees is $35,568 per year. The Department of Labor has proposed to increase the salary threshold to $50,440 per year in 2025.
Impact of the Proposed Salary Threshold
If the Department of Labor’s proposed salary threshold increase is implemented, it will have a significant impact on employers. Many employers will have to increase the salaries of their exempt employees to meet the new threshold. This could lead to increased labor costs for employers. Additionally, some employers may reclassify some of their exempt employees as non-exempt and begin paying them overtime pay. This could also lead to increased labor costs for employers.
| Year | Salary Threshold |
|---|---|
| 2023 | $35,568 |
| 2025 (proposed) | $50,440 |
Avoiding Misclassification Claims
1. Establish Clear Job Descriptions
Define precise responsibilities, duties, and performance expectations that align with the exempt criteria.
2. Use Specific Language
Incorporate clear language in job postings and contracts that reflects the exempt status, such as “exempt employee” or “management-level executive.”
3. Train Managers on Exempt Classifications
Educate managers on the DOL’s definitions and standards for exempt employees to ensure proper application.
4. Conduct Job Audits
Periodically review job functions and responsibilities to verify continued compliance with the exempt threshold.
5. Document Exempt Determinations
Maintain a record of the analysis and reasoning behind exempt classifications, including supporting documentation.
6. Seek Legal Advice
Consult with an employment attorney to obtain professional guidance on complex or ambiguous exemption issues.
7. Promote Open Communication
Establish open lines of communication with employees to clarify expectations and address any concerns regarding exempt status.
Additional Measures
* Utilize timekeeping systems to record hours worked and overtime.
* Monitor employee productivity and performance to ensure it aligns with the exempt criteria.
* Provide training and development opportunities to enhance employee skills and responsibilities.
| Proactive Measure | Benefit |
|---|---|
| Clear Job Descriptions | Reduces ambiguity and potential disputes. |
| Specific Language | Provides a clear legal basis for classification. |
| Manager Training | Ensures consistent application of exempt criteria. |
| Job Audits | Identifies any changes in job duties that may impact classification. |
| Documentation | Provides evidence of compliance in case of challenges. |
Strategies for Minimizing Costs and Maximizing Compliance
1. Review Current Salary Structure
Assess salaries and identify employees close to the new threshold. Consider adjusting salaries or reclassifying positions.
2. Implement a Job Analysis
Document the duties and responsibilities of exempt employees to justify their exempt status.
3. Audit Time Records
Monitor exempt employees’ time spent on non-exempt duties to ensure they remain within allowable thresholds.
4. Provide Clear Job Descriptions
Establish written job descriptions that clearly outline exempt and non-exempt responsibilities.
5. Train Managers and Employees
Educate managers and employees on the new exempt salary threshold and their responsibilities under the law.
6. Consider Variable Pay
Explore variable pay, such as bonuses or commissions, to supplement base salaries and avoid exceeding the threshold.
7. Utilize Automation
Automate non-exempt tasks to reduce the time exempt employees spend on these activities.
8. Analyze Job Duties and Responsibilities
Evaluate job duties and responsibilities to identify tasks that can be reassigned to non-exempt employees or outsourced. Ensure that exempt employees are performing duties that meet the criteria for exempt status, such as:
- Exercising independent judgment and discretion
- Performing original and creative work
- Managing employees or directing the work of others
Best Practices for Updating Employee Policies
Review Existing Policies
Before making changes, thoroughly review existing policies to identify areas that may need to be updated or modified.
Involve Key Stakeholders
Engage with HR leaders, legal counsel, and managers to gather input and perspectives on necessary updates.
Communicate Changes Clearly
Provide clear and concise communication to employees regarding policy changes, ensuring they understand the rationale and implications.
Train Employees
Conduct training sessions to educate employees on the updated policies and answer any questions they may have.
Use Technology for Efficiency
Utilize employee portals or intranets to make policies easily accessible and searchable for employees.
Regularly Monitor and Review
Establish a schedule for regularly monitoring and reviewing policies to ensure they remain relevant and effective.
Consider Employee Feedback
Encourage employees to provide feedback on the updated policies and suggest any further improvements or clarifications.
Document Changes
Maintain a record of all policy changes, including the date of revision, the reason for the change, and any relevant approvals.
Table: Specific Policy Updates for Federal Exempt Salary Threshold 2025
| Policy Area | Specific Updates |
|---|---|
| Job Classifications | Review and revise job classifications to ensure they meet the new salary threshold requirements. |
| Pay Practices | Update pay practices to comply with the new salary threshold, including adjusting salaries or providing additional benefits. |
| Employee Exemptions | Identify employees who may qualify for the new exempt status based on their duties and responsibilities. |
| Overtime Eligibility | Adjust overtime eligibility criteria for employees who fall below the new salary threshold. |
1. New Salary Threshold
The final rule set a new salary threshold of $35,568 per year for the “white collar” exemptions (executive, administrative, and professional) under the Fair Labor Standards Act (FLSA). This threshold is more than double the previous threshold of $23,660.
2. Implementation Date
The new salary threshold will go into effect on January 1, 2023.
3. Impact on Employers
The new salary threshold is expected to impact millions of workers and employers. According to the Department of Labor, about 1.3 million workers will become eligible for overtime pay as a result of the new rule.
4. Exempt vs. Nonexempt
The FLSA divides employees into two categories: exempt and nonexempt. Exempt employees are not entitled to overtime pay, while nonexempt employees are entitled to overtime pay for hours worked over 40 in a workweek.
5. Exemptions
There are several exemptions to the FLSA’s overtime pay requirements, including the “white collar” exemptions for executives, administrators, and professionals.
6. Duties Test
To qualify for the “white collar” exemptions, employees must meet certain duties tests. These tests ensure that employees are performing the duties of an executive, administrator, or professional.
7. Salary Basis
In addition to meeting the duties tests, employees must also be paid on a salary basis to qualify for the “white collar” exemptions.
8. Salary Threshold
The salary threshold is the minimum salary that employees must be paid to qualify for the “white collar” exemptions. The new salary threshold is $35,568 per year.
9. Impact on States
The new salary threshold is a federal minimum. States may set their own higher salary thresholds for the “white collar” exemptions.
10. Future of Exemption-Based Classification
The Department of Labor is currently reviewing the “white collar” exemptions. The review could result in changes to the duties tests, salary basis requirement, or salary threshold.
Federal Exempt Salary Threshold 2025
The federal exempt salary threshold is the minimum salary that an employee must be paid in order to be exempt from overtime pay. The current threshold is $35,568 per year, or $684 per week. This threshold has not been updated since 2004, and is widely considered to be too low. In 2025, the exempt salary threshold is expected to increase to $56,400 per year, or $1,080 per week. This increase is long overdue, and will help to ensure that workers are paid fairly for their time.
There are a number of reasons why the exempt salary threshold should be increased. First, the cost of living has increased significantly since 2004. As a result, the current threshold is not sufficient to provide a living wage for many workers. Second, the exempt salary threshold has not kept pace with inflation. As a result, it has become increasingly difficult for workers to qualify for overtime pay.
The increase in the exempt salary threshold is a positive step towards ensuring that workers are paid fairly for their time. This increase will help to close the gap between the rich and the poor, and will help to create a more just and equitable economy.
People Also Ask
What is the federal exempt salary threshold?
The federal exempt salary threshold is the minimum salary that an employee must be paid in order to be exempt from overtime pay.
What is the current federal exempt salary threshold?
The current federal exempt salary threshold is $35,568 per year, or $684 per week.
What is the expected federal exempt salary threshold in 2025?
The expected federal exempt salary threshold in 2025 is $56,400 per year, or $1,080 per week.
Why is the federal exempt salary threshold being increased?
The federal exempt salary threshold is being increased because the current threshold is not sufficient to provide a living wage for many workers and has not kept pace with inflation.
How will the increase in the federal exempt salary threshold affect workers?
The increase in the federal exempt salary threshold will help to ensure that workers are paid fairly for their time and will help to close the gap between the rich and the poor.
