New Overtime Rules

The Fair Labor Standards Act requires employers to pay non-exempt employees one and one-half times their regular rate of pay for all hours worked over 40 in a workweek. The key to overtime compliance is correctly classifying employees as either exempt or non-exempt, which depends on both the salary level test and the duties test. The Department of Labor's 2024 overtime rule update raised the standard salary threshold for exemption to $43,888 annually (effective June 2024), with a subsequent increase to $58,656 scheduled for January 2025. These thresholds represent the minimum salary an employee must earn to qualify for overtime exemption—employees earning below these amounts are entitled to overtime pay regardless of their job titles or the type of work performed. The Highly Compensated Employee exemption applies a separate, higher salary threshold for workers who perform at least one qualifying exempt duty. Non-exempt employees—both hourly workers and salaried employees who do not meet the exemption criteria—must have their hours tracked and receive overtime compensation for all hours over 40 per workweek. The FLSA's overtime rules are among the most frequently litigated areas of employment law, and violations—even unintentional ones—can result in significant back pay liability, liquidated damages, and attorney's fees. Staying current on overtime rule developments is a critical ongoing responsibility for HR and payroll professionals across all industries.

Calculating the regular rate of pay correctly for FLSA overtime purposes is one of the most frequently misunderstood areas of wage and hour compliance, and errors in the calculation create significant overtime underpayment liability. The regular rate of pay is not simply the employee's hourly rate—it is a broader concept that includes most forms of compensation received for employment during the workweek. The regular rate is calculated by dividing the total compensation for the workweek by the total hours worked, then multiplying the result by 0.5 for each overtime hour. Compensation that must be included in the regular rate calculation includes base hourly or salary pay, non-discretionary bonuses, commissions, shift differentials, on-call pay, and the reasonable cost of lodging provided as part of wages. Compensation specifically excluded by the FLSA from the regular rate includes discretionary bonuses, overtime premiums, gifts, vacation pay, reimbursements for business expenses, and contributions to qualified benefit plans. Non-discretionary bonuses—those promised in advance based on performance, production, or other criteria—must be included and can retroactively create overtime underpayments if not incorporated into the regular rate calculation when first paid. Employers with complex compensation structures including commissions, piece rates, or incentive pay should conduct regular regular-rate audits to ensure overtime calculations correctly capture all includable compensation components and comply with FLSA requirements.

The FLSA provides several overtime exemptions, the most widely applicable of which are the white-collar exemptions covering executive, administrative, professional, outside sales, and computer employee roles. Each exemption has its own combination of salary level, salary basis, and duties requirements that must all be satisfied simultaneously for the exemption to apply. Executive employees must primarily manage a department or subdivision, customarily direct the work of at least two full-time employees, and have authority to hire, fire, or make effective recommendations on employment decisions. Administrative employees must perform office or non-manual work directly related to management or general business operations and exercise discretion and independent judgment with respect to matters of significance. Professional employees must perform work requiring advanced knowledge in a field customarily acquired through a prolonged course of specialized education. Outside sales employees who regularly travel away from their employer's place of business to make sales or obtain orders are exempt without regard to salary. Computer employees performing certain technical roles in system analysis, programming, or software design qualify for exemption at either the salary threshold or a specified hourly rate. The highly compensated employee exemption applies a higher salary threshold but a more relaxed duties requirement. State laws in some jurisdictions impose higher salary thresholds or more stringent duties tests than federal law, requiring employers to apply the more protective standard. Periodic duties reviews ensure ongoing compliance with these complex, multi-factor exemption requirements.

The FLSA imposes comprehensive recordkeeping requirements on employers for non-exempt employees, and the accuracy and completeness of these records is essential for defending against wage and hour claims. Employers must maintain records of each non-exempt employee's name, address, occupation, sex, and date of birth if under 19; total daily and weekly hours worked; total weekly straight-time earnings and total overtime premium paid; deductions from or additions to wages; and the date of payment and pay period covered. There is no specific FLSA-mandated time-tracking method—employers may use time clocks, electronic timekeeping systems, handwritten timesheets, or other methods—but the records must be complete and accurate. Employers cannot require employees to work off the clock, and hours worked must include all time the employer suffers or permits the employee to work, including pre-shift preparation, post-shift cleanup, and work performed remotely outside scheduled hours if the employer knew or should have known the work was being performed. FLSA records must be retained for a minimum of three years for payroll records and two years for time cards and supporting documentation. In wage and hour litigation, if an employer's records are inadequate, courts may accept the employee's testimony about hours worked and award damages based on that estimate—a risk that well-maintained timekeeping systems effectively eliminate. Periodic audits of timekeeping practices and payroll records help employers identify and correct compliance gaps before they become costly claims.

While the FLSA establishes the federal floor for overtime protections, many states have enacted overtime laws that provide greater protections—and employers must comply with whichever standard is more favorable to the employee in each applicable jurisdiction. California is the most prominent example of state overtime expansion: California law requires overtime pay for all hours worked beyond 8 in a single day, not just 40 in a workweek, and double-time pay applies for hours beyond 12 in a day or beyond 8 on the seventh consecutive workday in a workweek. Several states have higher salary thresholds for overtime exemptions than the federal standard, requiring employers to maintain separate exemption analyses for each state where they operate. Some states extend overtime protections to categories of workers exempt under federal law—for example, agricultural workers in California have overtime rights that do not apply under the FLSA. State laws may also govern which types of compensation must be included in the overtime rate calculation, sometimes diverging from federal regular-rate rules. Multi-state employers must implement payroll systems capable of applying the correct overtime rules for each state and, in some cases, for local jurisdictions with their own wage and hour requirements. Given this complexity, HR and payroll professionals at organizations operating across multiple states benefit significantly from specialized training on state-specific overtime rules and from periodic legal reviews of their overtime compliance practices in each jurisdiction where employees work.