Overtime Update

Federal overtime regulations under the FLSA have undergone significant changes in recent years through Department of Labor rulemaking, with salary threshold adjustments being the primary focus of regulatory activity. The DOL has periodically updated the minimum salary level required for the white-collar overtime exemptions — the threshold that employees must be paid above to potentially qualify as exempt from overtime. These updates have been subject to legal challenges and changes across administrations, making it critical for employers to verify the current applicable threshold rather than relying on figures from prior years. Beyond salary thresholds, proposed and finalized rules have addressed the treatment of bonuses and incentive pay in the salary level calculation, the highly compensated employee threshold, and the mechanics of how automatic future increases are implemented. Employers should conduct a compliance review whenever a new overtime rule takes effect to assess whether any currently exempt employees fall below the new threshold and require either a salary adjustment or reclassification to non-exempt status with overtime eligibility.

Under the FLSA, whether an employee must receive overtime pay is determined by their classification as either exempt or non-exempt. Non-exempt employees — the default category — must receive one and one-half times their regular rate of pay for all hours worked over 40 in a workweek. Exempt status is not determined by job title alone but requires satisfying specific tests established by the FLSA and DOL regulations. The most commonly claimed exemptions are the white-collar exemptions for executive, administrative, and professional employees, which require that the employee be paid on a salary basis, paid at or above the minimum salary threshold, and primarily perform qualifying duties. Hourly workers are virtually always non-exempt regardless of their pay rate. Salaried workers may still be non-exempt if their salary falls below the threshold or their job duties don't meet the tests. Blue-collar workers performing manual labor are generally non-exempt regardless of pay level. The computer employee exemption, outside sales exemption, and highly compensated employee exemption have their own distinct criteria that must be carefully evaluated rather than assumed.

The FLSA's white-collar overtime exemptions — covering executive, administrative, and professional employees — require that workers be paid on a salary basis at or above the minimum weekly salary threshold established by the Department of Labor. This threshold has been updated multiple times through DOL rulemaking and is subject to change through regulatory action; employers must verify the current effective threshold rather than relying on historical figures, as significant increases have been proposed and implemented in recent years. The highly compensated employee (HCE) exemption applies a higher total annual compensation threshold with a reduced duties requirement, and this figure is also subject to DOL updates. For both thresholds, up to 10% of the required salary level may be satisfied by non-discretionary bonuses or incentive pay paid at least annually under current rules. State law may impose different or higher salary thresholds in some jurisdictions. Employers should conduct an annual audit comparing current employee salaries to applicable thresholds and reassess the classification of any employees earning near the threshold boundary to ensure ongoing compliance with updated requirements.

An overtime compliance audit is a systematic review of employee classifications, pay practices, and recordkeeping to identify and correct potential FLSA violations before they become government investigations or employee lawsuits. The audit should begin with a comprehensive inventory of all employees, their current classification (exempt or non-exempt), the exemption category claimed, their current salary or hourly rate, and the last time their classification was reviewed. For each exempt employee, the audit should verify that both the salary test and the duties test are satisfied by reviewing actual job responsibilities — not just job descriptions — against the specific criteria for the claimed exemption. Pay practices should be reviewed to ensure the regular rate of pay is correctly calculated for overtime-eligible employees, including all required components. Timekeeping records should be examined for completeness and accuracy. Multi-state employers should verify compliance with each applicable state's overtime rules in addition to federal FLSA requirements. The results should be documented, and any identified misclassifications should be corrected promptly with guidance from employment counsel regarding remediation of any back pay exposure.

Staying compliant with overtime rule changes requires HR and payroll teams to establish a proactive compliance infrastructure rather than reacting to rule changes after they take effect. The foundation is a compliance calendar that tracks the effective dates of all known regulatory changes at the federal and state levels, with internal review milestones set well in advance of each effective date. When a new salary threshold is announced, HR should immediately identify all exempt employees whose salaries fall in the range that may be affected and evaluate the options: increasing their salary to maintain exempt status, reclassifying them as non-exempt with overtime eligibility, or restructuring their schedules to limit overtime exposure. Payroll system configurations must be updated before the effective date to ensure correct overtime calculations are applied. Employee communication plans should address any classification changes proactively to prevent confusion or morale issues. Partnering with employment law counsel to interpret new rules and assess their impact on your specific workforce is particularly important when rules are newly effective or subject to legal uncertainty. Regular training keeps HR and payroll professionals equipped to apply updated rules correctly.