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New overtime rule impacting small businesses: Pay thresholds changing in 2024

The U.S. Department of Labor (DOL por sus siglas en Inglés) recently announced a new final rule, which revises and updates the Fair Labor Standards Act (FLSA). The final rule raises the minimum salary for most workers exempt from overtime pay, altering how and when businesses must compensate employees for working overtime. Previously, salaried workers in certain executive, administrative and professional roles earning less $35,568 annually were generally exempt from overtime pay. Now, starting on July 1, 2024, businesses must provide overtime pay to salaried workers who earn less than $43,888 a year. This threshold will further increase to $58,656 on January 1, 2025.

Impact on small businesses

Small employers will now be required to pay salaried employees at least time-and-a-half for working beyond 40 hours in a single work week. For highly compensated employees, the new salary threshold for exemption from overtime will increase from $107,432 to $132,964 starting July 1, 2024. That threshold will rise again to $151,164 on January 1, 2025. What’s more, salary thresholds will update every three years starting July 1, 2027.

Options for small employers

Small employers have a range of options to consider. This may include re-evaluating their workforce structure, pay structure, and much more. Here are some possibilities for each employee affected by the increased earnings threshold:

  • Reduce or eliminate overtime hours,
  • Increase the salary of the employee to at least the new salary level to retain their exempt status,
  • Pay an overtime premium of one-and-a-half times the employee’s regular rate of pay for any overtime hours worked,
  • Employers are still allowed to use annual bonuses to satisfy up to 10% of the salary threshold for highly compensated employees,
  • Reduce the amount of pay allocated to the employee’s base salary (provided that the employee still earns at least the applicable hourly minimum wage) to offset new overtime pay, or
  • Use some combination of the options above. 

NOTE: Small businesses are encouraged to review employee classifications. Exempt and non-exempt status may be determined through the salary basis test, the salary threshold test, and the job duties requirements outlined under the FLSA.

Exemptions from the new overtime threshold

While the FLSA does not provide specific exemptions for small businesses, the new salary thresholds generally apply to employees of enterprises that have an annual gross volume of $500,000 or more in sales. It also applies to employees individually covered by the law because they are engaged in interstate commerce or in the production of goods for commerce.

For businesses operating in states with more protective overtime standards than those outlined in the FLSA, the higher standard applies in that state. For example, California and New York currently have higher standards than the FLSA’s 2025 thresholds.

NOTE: Small businesses that may be exempt from the FLSA may still have obligations under their state’s overtime law, as well as an obligation to pay overtime to a nonexempt employee who is covered under the Individual Coverage rules.

To learn more about the FLSA, read the U.S. Department of Labor’s Small Entity Compliance Guide. For additional resources on overtime pay, visit DOL’s website.