by: Barry Dorans

This article will provide an overview of the changes proposed to go into effect on July 1, 2024 and January 1, 2025 under the Fair Labor Standards Act (“FLSA”) concerning overtime and the minimum salary.

What is the current law?  All employees, other than exempt ones, must be paid a base hourly wage plus time and a half for any hours over 40 in a work week. For most exemptions, to qualify: (1) the employee’s primary duty must fit within a certain classification; and (2) the employee must be paid on a salary basis of a minimum amount. The current minimum is $684 per week ($35,568 per year).

What is the new standard? Effective July 1, 2024, the primary duty test is unchanged but the minimum salary will increase to $844 per week ($43,888 per year) and as of January 1, 2025 the minimum salary is $1,128 per week ( $58,656 per year).  As of July 1, 2027, it will increase again.

What are the employer’s options? 

(1) The employer can give raises to exempt employees so that they are paid at least the minimums listed above;

(2) Determine if the employee qualifies for an exemption that does not require payment on a salary basis. For example, certain outside salesman, certain commissioned employees of a retail or service establishment who are paid primarily by commission are exempt even though not paid a minimum salary. Confirm with your counsel that the individual qualifies as these exemptions are quite narrow;

(3)  Restructure the job and hours so that the regular work week is 37 ½ hours, and make sure employees do not work overtime.  Using 37 ½ ,  you have a tolerance for an employee who comes in a little early or leaves a little late a day or two a week without running into overtime.

 (4) Convert lower salaried exempt employees to hourly and pay OT for hours over 40. Note that employers are not required to convert the current salary basis to an hourly rate by dividing by 40. While the hourly rate must at least equal the minimum wage, the employer can determine what an equivalent hourly wage would be, considering the impact of overtime.  So if an employee normally works 50 hours a week, you could divide their normal pay by 55  ( 40 hours of straight time plus 10 hours of OT at time and a half) to set their new hourly rate.

Potential problems. Any time an employer changes an employee’s rate of pay, it is bound to create problems. One potential problem is that even if the employer resets the hourly rate as mentioned above, the employee’s take home pay will only be the same if they work the exact same number of hours each year.  Even if that is true, if the amount of OT varies over the course of the year, their take home will be less on the slow weeks and more on the high weeks. If the employer pays a bonus to offset the decrease in the slow weeks, that presents a calculation issue because if any OT was worked that period, part of the bonus must be paid at time and a half rate.

Legal Challenge.  A similar increase in the base salary was proposed in 2016, but a court issued a nationwide temporary injunction prohibiting it from going into effect. Eventually the government withdrew the proposed increase.  A similar suit has been filed this time. There is no guarantee that a temporary injunction will be issued, or if issued that it will impact employers in Virginia, and even if a nationwide temporary injunction is issued, it extremely unlikely that it is so far in advance of July 1 that an employer will not have to prepare for the increase to go into effect. So unfortunately, if you have not already started preparing , you should now.

Conclusion. These changes will likely require most employers to change how they treat many of their exempt employees, especially managers. A few of those employees may be recharacterized to fit within another exemption. For others, the employer may have to increase the salary to equal the new minimum or transition the employee to an hourly employee with overtime. The employer needs to carefully structure the pay policy so as not to violate overtime rules, yet not drastically increase payroll. We strongly recommend you consult with an attorney to make sure the employees are paid correctly. If employees are not paid correctly, the Department of Labor has the right to file suit on behalf of all employees to recover all unpaid overtime plus damages of an additional 100% of the amount owed. The owners of the company and any persons involved in paying the employees can be held personally liable. Additionally, private attorneys can sue and recover similar amounts for their client, plus attorneys’ fees.

Note that this is only a brief overview, please consult with an attorney to make sure you are in compliance with the FLSA and other Federal  and state laws.