Starting January 1, 2025, the U.S. Department of Labor (DOL) will implement new overtime rules that raise the salary threshold for employees who are exempt from overtime pay. To be exempt from overtime, salaried employees must now earn at least $58,656 per year (or $1,128 per week). This is a significant increase from the previous threshold of $43,888 annually, set in July 2024. Employees earning below $58,656 will now qualify for overtime pay whenever they work more than 40 hours in a week. Here’s a clear guide to help you understand these changes and implement them in your business.
Key Changes and Requirements
- New Salary Threshold for Overtime Exemption:
- Effective January 1, 2025, salaried employees must earn $58,656 annually ($1,128 per week) to be considered exempt from overtime. If an employee’s salary is below this threshold, they are now eligible for overtime pay at 1.5 times their regular hourly rate for any hours worked beyond 40 in a week.
- Periodic Adjustments:
- The DOL has also set up an automatic update mechanism to periodically raise this salary threshold in response to economic changes. Businesses should stay updated on future changes to maintain compliance.
- Job Duties Requirement:
- In addition to meeting the salary threshold, employees must perform specific “exempt” job duties (executive, administrative, or professional roles) to qualify as exempt from overtime.
Steps to Implement the New Overtime Rules
Step 1: Identify Affected Employees
- Review your salaried employees and identify those earning below the new threshold of $58,656 per year. These employees will need to be classified as “non-exempt” under the new rules, meaning they are eligible for overtime pay if they work more than 40 hours in a week.
Step 2: Options for Employees Below the Threshold
You have two main options for salaried employees who fall below the new threshold:
- Increase Their Salary to Maintain Exempt Status: If an employee’s salary is close to $58,656, consider raising it to the new threshold to keep them classified as exempt. This might be a good option if the employee regularly works more than 40 hours a week.
- Pay Overtime as Non-Exempt: If adjusting their salary isn’t feasible, reclassify the employee as non-exempt and start tracking their hours. They will now qualify for overtime pay if they work more than 40 hours in a week.
Step 3: Calculate Overtime Pay for Non-Exempt Salaried Employees
For salaried employees who earn below the $58,656 threshold, here’s how to calculate their overtime pay:
- Determine an Hourly Rate: Divide the employee’s weekly salary by 40 hours to get an hourly rate.
- Calculate Overtime at 1.5 Times the Hourly Rate: For any hours over 40 in a workweek, pay the employee 1.5 times their hourly rate.
Example: Calculating Overtime for a Salaried Employee
Let’s say you have an employee, Alex, who earns $50,000 annually—below the $58,656 threshold. Here’s how you’d handle overtime for Alex under the new rules:
- Classify Alex as Non-Exempt: Since Alex earns less than $58,656, he must be classified as non-exempt and eligible for overtime pay.
- Calculate Alex’s Hourly Rate:
- Weekly Salary: $50,000 per year / 52 weeks = $961.54 per week.
- Hourly Rate: $961.54 / 40 hours = $24.04 per hour.
- Calculate Overtime Pay if Alex Works Over 40 Hours:
- Suppose Alex works 45 hours in a given week. For the 5 hours over 40, he’ll be paid overtime at 1.5 times his hourly rate:
- Overtime Rate: $24.04 x 1.5 = $36.06 per hour.
- Total Pay for the Week:
- Regular pay for 40 hours: 40 x $24.04 = $961.60.
- Overtime pay for 5 hours: 5 x $36.06 = $180.30.
- Total Weekly Pay: $961.60 + $180.30 = $1,141.90.
Step 4: Set Up Accurate Time Tracking
If you’re reclassifying salaried employees as non-exempt, you’ll need a reliable way to track their hours worked. Ensure employees understand how to log hours accurately, and train supervisors to verify time records.
Step 5: Communicate Changes to Employees
- Explain Reclassification and Pay Changes: Clearly communicate these changes to affected employees. Explain their new overtime eligibility, how their pay will be calculated, and any new requirements for tracking hours.
Step 6: Update Payroll Systems
- Make sure your payroll system can handle overtime calculations for newly non-exempt employees and that you have policies in place for approving overtime if needed.
Step 7: Set Overtime Approval Policies
- To control overtime costs, set policies requiring employees to obtain approval before working more than 40 hours in a week. Clear policies help manage costs and set expectations for employees around overtime work.
Final Thoughts
With the new DOL threshold of $58,656 for exempt status, many salaried employees will now qualify for overtime pay. By identifying affected employees, deciding on salary adjustments or overtime eligibility, and implementing time-tracking and payroll processes, you can ensure compliance with the new regulations. For assistance with planning these changes and making sure your business is prepared, please reach out to our office. We’re here to support a smooth transition and ensure compliance with the updated overtime rules.
