The U.S. Department of Labor (DOL) released a new final rule in the spring of 2024 changing the salary threshold for determining whether employees are exempt from federal overtime pay requirements under the Fair Labor Standards Act (FLSA). Although the new rule took effect July 1, 2024, opponents have already filed litigation challenging it. Here is what you need to know while the lawsuits play out.

Overtime test

The FLSA requires that employers pay nonexempt workers overtime pay at a rate of 1.5 times their regular pay rate for hours worked per week that exceed 40. Employees are exempt from the overtime requirement if they fulfill the following three tests:

1. Salary basis. The employer pays the employee a predetermined and fixed salary that is not subject to reduction based on variations in the quality or quantity of their work.
2. Salary level. The salary is not less than a specific or threshold amount.
3. Duties. The employee primarily performs executive, administrative or professional duties.

The new rule raises the threshold for the salary level in two steps. Previously, most salaried workers who earned less than $684 per week or $35,568 per year became eligible for overtime. On July 1, 2024, the threshold rose to $844 per week or $43,888 per year. On January 1, 2025, it will climb further, to $1,128 per week or $58,656 per year.

Notably, the increases employ the same methodology that the previous rule used (which could make it more likely to withstand court challenges). However, that rule also is the subject of a lawsuit.

Highly compensated employees

The new rule also increases the total compensation requirement for highly compensated employees (HCEs) who are subject to a looser duties test than employees who are paid less. Now, they are required to “customarily and regularly” perform only one of the duties of an exempt executive, administrative or professional employee, versus primarily performing such duties.

The former rule applied to HCEs who performed office or non-manual work and earned total compensation (including bonuses, commissions and certain benefits) of at least $107,432 per year. The salary threshold rose to $132,964 per year on July 1, 2024, and will go up to $151,164 on January 1, 2025.

Under the final rule, all salary thresholds will be updated every three years, based on current earnings data from the most recent available four quarters of data from the Bureau of Labor Statistics. The DOL can, however, temporarily delay a scheduled update due to unforeseen economic or other conditions.

No-for-profits’ next steps

With the future of the new rule uncertain, your organization may want to err on the side of caution. If you have not already done so, review your employees’ salaries to identify those whose salaries exceed the previous level but fall below the new thresholds.

For those employees who are now exempt under the new thresholds, you could increase their salaries to retain their exempt status. Other options include reducing or eliminating overtime hours or paying overtime to these employees. You also can reduce an employee’s salary to offset new overtime pay. Budget adjustments, as well as training for newly nonexempt employees about timekeeping and limits on off-the-clock hours, might be necessary.

Bear in mind that salary alone does not make employees exempt — they also must satisfy the applicable duties test. An employee whose salary exceeds the threshold but does not primarily engage in applicable duties is eligible for overtime pay.

Stay tuned

Litigation over the DOL’s new rule may take time to play out and a court could block the rule while the lawsuits proceed. Your not-for-profit should pay close attention and seek professional advice on how to stay on the right side of the law.

Sidebar: Does it apply to your not-for-profit?

The U.S. Department of Labor (DOL) has indicated that not all not-for-profits are subject to the new overtime rule because they are not all covered by the Fair Labor Standards Act (FLSA). For example, the law does not necessarily apply to employers with an annual dollar volume of sales or business less than $500,000. Also, charitable, religious, educational and similar activities generally are not considered in the calculation unless they compete with businesses. Only activities performed for a business purpose are included.

However, a not-for-profit’s employees could still be covered by the FLSA under “individual coverage,” meaning they are involved in interstate commerce. The DOL defines such involvement broadly. It includes employees who regularly make out-of-state phone calls, handle records of interstate transactions and travel to other states for work or produce goods that will be sent out of state (including, for example, an administrative staffer typing letters). If your organization regularly interacts with out-of-state contacts, the new overtime rule likely applies to your organization.

For more information, contact Sarah Widlock at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.