June 20, 2024

Potential Impacts of the New Federal Overtime Rule

As discussed here, the new federal overtime rule raising the salary threshold for overtime exemptions (i.e., executive, administrative, professional) will have significant implications for agricultural employers subject to the Fair Labor Standards Act (FLSA).  

Under the FLSA, employees generally must be paid an overtime premium of 1.5 times their regular rate of pay for all hours worked beyond 40 in a workweek unless they qualify for an exemption.  An exemption applies when:  

  • An employee is paid a salary,   
  • The salary is not less than a minimum salary threshold amount, and  
  • The employee primarily performs executive, administrative or professional duties. 

Under the new rule, beginning July 1, 2024: 

  • Salaried workers earning less than $844 per week ($43,888 annually) will become eligible for overtime. 
  • The annual threshold for “highly compensated employees” will increase to $132,964 

A second phase increase is scheduled for January 1, 2025:  

  • Salaried workers earning less than $1,128 per week ($58,656 annually) will become eligible for overtime. 
  • The annual threshold for “highly compensated employees” will increase to $151,164 

Starting July 1, 2027, these earnings thresholds will be updated every three years so they keep pace with changes in worker salaries, ensuring that employers can adapt more easily because they’ll know when salary updates will happen and how they’ll be calculated. 

It is important to note that the new rule only impacts the monetary threshold for existing exemptions, it does not change current regulations or create new ones. California employers remain subject to current state thresholds for exempt workers.   

What Does It Mean? 

As these changes occur, salary thresholds are important, but overall job duties will continue to determine overtime exemption status for most salaried employees. As the first phase increase quickly approaches, employers should take note of the following key impacts and next steps: 

Key Impacts 

  • More workers eligible for overtime pay: It is estimated that many salaried workers currently classified as exempt, such as farm managers or supervisors, will fall below the new $43,888 and $58,656 annual salary thresholds starting July 1, 2024, and January 1, 2025, respectively. As such, it is likely these workers will need to be evaluated for salary increases or reclassification. 
  • Increased labor cost: Paying overtime to newly non-exempt workers will increase overall labor costs, especially for companies with employees regularly working over 40 hours per week during peak seasons (e.g., planting and harvesting). Although the increases take effect in two phases, it is important to keep in mind that the lower threshold will quickly increase creating an immediate need to look ahead and plan for the larger increase taking effect January 1, 2025, and beyond. 
  • Compliance challenges: The advent of electronic timekeeping – and its myriad risk lowering benefits – is quickly making use of these systems imperative. The need to potentially track additional non-exempt workers accelerates the need to implement updated timekeeping systems and policies to track hours worked and ensure proper overtime compensation. 

Next Steps  

  1. Review exempt employee salaries and plan ahead: Identify any currently exempt workers whose salaries fall below the new $43,888 threshold effective July 1, 2024, and look ahead to plan for the $58,656 threshold increase effective January 1, 2025. 
  2. Decide whether to raise salaries or reclassify: For affected workers, determine if raising salaries to meet or exceed the new threshold is feasible to maintain the overtime exemption. If not, all nonqualifying positions will need to be reclassified as non-exempt. 
  3. Prepare for increased labor costs: An increase in salaries or non-exempt workers will have a definite impact on labor costs. Companies should begin budgeting for potentially higher labor costs associated with increases or reclassified workers, especially during labor-intensive periods. 
  4. Implement timekeeping and policies: Establish or revise internal systems to accurately track hours worked for newly non-exempt employees. Update policies on overtime approval, breaks, use of devices, and more. 
  5. Provide training: Ensure reclassified workers and their managers understand the new policies, timekeeping requirements, overtime rules, and prohibited off-the-clock work. 

To lower risks associated with changes to employee status, employers will need to carefully review their workforce classification and compensation practices to ensure compliance with the new rule. Proactive planning can help mitigate potential cost increases and compliance risks.