In general, under the Fair Labor Standards Act (FLSA), a person must satisfy three criteria to qualify as exempt from federal overtime pay requirements: first, they must make a salary; second, that salary must be more than $684/week ($35,568 annually); and third, their “primary duty” must be consistent with those common to executive, administrative, or professional positions.

On April 23, 2024, DOL released its final rule altering the overtime pay regulations under the FLSA. The rule makes significant changes to the regulations governing who qualifies for the “executive, administrative, and professional” (EAP) – or “white collar” – exemption. The workers who qualify for the white collar exemption are not eligible for overtime pay for any hours over 40 worked in a given workweek. Fortunately, both the U.S. District Court for the Eastern District of Texas and the U.S. District Court for the Northern District of Texas vacated the rule in 2024, but DOL has appealed the decisions to the U.S. Court of Appeals for the 5th Circuit. It remains to be seen what the incoming Trump administration will do on the overtime regulation or with the litigation challenging the Biden-era final rule.

The Biden Administration’s Final Rule

• Increased the minimum salary threshold twice:
  • The first increase raised the threshold to $43,888, a 23% increase over the current threshold. This increase went into effect on July 1, 2024, giving employers only two months to come into compliance.
  • The second increase would have gone into effect on January 1, 2025, and raised the threshold to $58,656, representing a nearly 65% increase over the current threshold. DOL landed on this threshold by using a new methodology for calculating the minimum salary threshold – tying the threshold to the 35^th percentile of weekly earnings for full-time workers in the lowest-wage census region (the South).
• Increased the highly compensated employee (HCE) total annual compensation threshold twice:
  • The first increase raises the threshold from the current $107,432 to $132,964, a nearly 24% increase. The increase goes into effect on July 1, 2024.
  • The second increase raises the threshold to $151,164, a 40% increase over the current threshold. The second increase goes into effect on January 1, 2025.  DOL used a new methodology to determine this threshold as well. It represents the 85^th percentile of weekly earnings of full-time salaried workers nationally.
• Implemented automatic updates to both thresholds every three years by tying them to their respective percentiles of weekly earnings.

The Consequences of Misguided Changes to the Overtime Regulations

Increasing the minimum salary and HCE thresholds in such drastic ways would impose massive increases in labor costs for employers, especially small businesses and organizations operating on fixed budgets, such as public employers and non-profits  who would be forced to cut critical programming, staffing, and services. Many employers would be forced to reclassify employees from salaried to hourly, resulting in reduced career advancement opportunities and flexibility in the workplace. These changes would lead to low employee morale and productivity, hurting businesses even further, while the American people would see more increases in prices for goods and services as well as diminished customer service.

Automatic updates, moreover, mean DOL would increase the threshold regardless of the economic circumstances at the time. This would inevitably exacerbate any economic problems, like today’s supply chain disruptions, worker shortages, and high inflation. Forced increases in labor costs at economically vulnerable times could have dangerous consequences.

Importantly, the first Trump administration updated the overtime regulations in 2019 and implemented a reasonable increase to the minimum salary threshold. The Trump-era DOL was forced to act after the Obama administration had finalized a dramatic and unprecedented increase to the threshold in May 2016. The Obama administration tried to implement an increase of over 100%, but that increase was so out of line with past increases and the intent of the FLSA that a federal judge invalidated the rule.

Proof of the negative impact of drastic changes to the overtime regulations can be seen in the sheer number and variety of organizations and industries that submitted comments to DOL on the Biden administration’s rulemaking. PPWO itself is composed of a range of industries representing private sector businesses, nonprofit organizations, higher education institutions, and state and local public entities. It’s clear that radical changes to the overtime regulations would negatively impact every aspect of the economy.