Guide to salary threshold updates

Upcoming Changes to the Salary Threshold: What You Need to Know

The Fair Labor Standards Act (FLSA) establishes federal wage standards including minimum wage and overtime pay. Enforced by the Department of Labor, this act created exemptions to overtime standards for certain roles. To classify an employee as exempt, employers must provide a predetermined salary that meets the salary threshold requirements, and the employees job role must meet the exemption standards set out.

The threshold has remained unchanged since 2020, but is scheduled to increase in stages, first on July 1, 2024 and then again on January 1, 2025. These updates mean employers need to review exempt roles and make decisions on how to increase salaries or change employee statuses to ensure wage policies remain in compliance.

Now is the time to start reviewing employee statuses and wages to determine how best to comply with these new regulations.

History of Threshold Requirements

The DOL issued standards in 2004 which remained in effect until 2020. Using the standard salary level of the 20th percentile of salary earnings in the lowest-wage Census region, the 2020 salary level was set at $684 per week, or $35,568 per year.

This increase came after an unsuccessful attempt to raise salary standards to $913 per week in 2016. The 2016 changes were stopped by a federal judge right before going into effect, and eventually invalidated in 2017, leaving the salary threshold at the 2004 level.

In 2004 the minimum salary was set at $455 per week, or $23,660 per year. The 2019 updates were set to ensure minimum salary standards met the growth of salaried worker wages in the U.S.

Why are Salary Requirements Changing?

Salary requirements are being updated for the first time in four years to meet the changing U.S. economy. This new ruling is meant to expand overtime protections for lower-paid salary workers.

The idea behind the threshold updates is to address classification errors that have employees who should be classified as nonexempt earning a lower salary than the average and being unable to earn overtime pay. Under the new ruling, these lower-paid salary workers will receive a higher salary or be reclassified.

Employees who are reclassified will get the benefit of either receiving overtime pay for their time past 40 hours per week or, if they do not work overtime hours, they will have more free time to spend outside of the office. The DOL estimates this salary ruling will benefit 4 million workers.

Key Changes to the Salary Threshold

The first stage of the salary requirements is scheduled to go into effect on July 1, 2024, raising salary minimums to $844 per week, or $43,888 per year. This change is based on the same standards used to increase salary minimums in 2019.

Another increase is scheduled to go into effect January 1, 2025, raising salary minimums to $1,128 per week, or $58,656 per year. This update will be based on a new model that is based on the 35th percentile of salary earnings for the lowest-wage Census region.

The July update will represent a 23% increase in minimum salaries, with another 34% increase in January. Such significant increases mean employers need to make some important decisions about how they will adjust wage policies for their company.

The updated salary threshold establishes ongoing updates every three years based on the new model for calculating minimum salaries. Another update is scheduled to occur in 2027 and will be reviewed every three years after this.

The new ruling will also increase minimum salaries for Highly Compensated Employees (HCEs). On July 1, salaries for HCEs will increase from $107,432 to $132,964. This is scheduled to increase again on January 1 to $151,164.

How Can Employers Prepare for Salary Changes?

The DOL estimates the new salary threshold will impose $1.4 billion in direct costs on employers to implement. This includes $299 million in adjustment costs. Employers will need to think strategically about how to implement these changes effectively and make the financial burden less stressful for the company.

Organizations have a few options available to address the changes and maintain compliance with the new overtime rule:

Option 1: Change Employee Statuses to Nonexempt

A review of exempt and nonexempt employees may reveal that some exempt employees are misclassified. There may also be some employees who don’t regularly work overtime hours, making it easier to change their classification to nonexempt. Remember, changing an employee’s classification to nonexempt means employers are required to pay overtime pay if the employee work more than 40 hours a week.

Option 2: Make Salary Adjustments in Increments

Most experts expect to see some pushback on the January updates to salary thresholds. As such, one recommendation is to plan increases to meet the July 2024 requirements now and make another adjustment in January. Keep in mind, making the changes in stages could cost your company more in administrative costs than making the adjustments immediately.

Option 3: Adjust to Meet the Full Threshold Requirements in July

Some experts are advising employers to go ahead and implement the full required changes in July. Increasing salaries to meet the requirements for January 2025 can reduce administrative costs and make the adjustment easier to manage. While implementing all the changes in July could make the process easier, it does mean an increase of up to 65% in some individual’s salaries at one time.

When determining how to comply with the salary threshold requirements, keep in mind that nondiscretionary bonuses and incentive payments can be used to satisfy up to 10% of the standard salary level. Employers can also provide a catch-up payment if an employee has not made enough in incentive payments to meet requirements at the end of the year. The catch-up payment must be issued within one pay period after the end of the year, and this payment cannot be counted towards next year’s payment.

Strategies for Compliance: Steps to Get Ready for Threshold Changes

Compliance with the new salary threshold requirements will require several changes to company policies and procedures. It’s important to start addressing needed changes now so the process of implementing the changes goes as smoothly as possible when the time comes.

Step 1 – Review Compensation Practices

Preparing for threshold changes is a good time to review employees classified as exempt and make sure they comply with the exempt employee requirements. The DOL has specific requirements governing who can be considered exempt. Along with salary requirements, exempt employees must meet the criteria to be covered under the executive, administrative, professional, or computer employee exemption.

Review the exemption requirements and make a list of any employees potentially misclassified. When making adjustments to meet salary requirements, these employees can be reclassified to ensure compliance with all DOL salary regulations.

Step 2 – Compile a List of All Remaining Exempt Employees

Create a list of all exempt employees who meet the criteria and whose salary is currently less than the upcoming salary requirements. Determine what criteria to use internally for determining who will remain exempt and who will be reclassified. Using this list, organize employees based on established internal criteria.

If some employees will be reclassified to nonexempt, determine how to set their hourly rate based on their current pay and the estimated overtime they will work. Take this time to determine how to track work hours for any employees who are reclassified.

Step 3 – Consider Employee Morale

When making decisions about how to handle salary changes, consider how these decisions will affect employee morale. This is especially important when reclassifying employees.

Reclassification can have a negative effect on morale as it can be perceived as a demotion to employees who are accustomed to being salary-based. Prepare employees for any changes ahead of time and be prepared to answer questions about the decisions made around wages.

Step 4 – Adjust Company Policies

Any changes made, especially those involving reclassification, will require edits and updates to company policies. Consider what these changes will entail when reviewing salaries to help determine which options will work best for the company.

Communicate early and often about these policy updates and how they will affect employee responsibilities such as timekeeping requirements and break procedures. Provide training for employees who will be affected and for managers on how to maintain compliance.

Step 5 – Continue to Monitor Salary Threshold Updates

Most experts expect legal challenges from business groups or states opposing the salary threshold ruling. Keep up with these challenges as they occur to be prepared for any new developments.

While monitoring legal challenges is recommended, do not rely on any of these challenges to stop the threshold ruling from being implemented. It is recommended to prepare as if the changes will take effect.

Step 6 – Keep Up with State Requirements

While focus is on these federal salary threshold regulations, it’s easy to forget that several states have their own threshold requirements, and some of these may be affected by the upcoming federal changes. Review state regulations and make sure all wage requirements are complied with.

Reviewing Necessary HR and Administrative Adjustments

Moving forward, administrative staff will need to pay attention to updated salary threshold requirements as the new ruling includes adjustments every three years. Pay attention to how employees are classified and make sure that all exempt employees meet the requirements for this classification.

HR and administrative staff need to make sure all the tools are in place to track work hours for reclassified, nonexempt employees. Consider how employees work to find the right tools to meet company and team needs.

Consider company policies around office equipment and behavior when making classification changes. Everyone will need time to prepare and adjust, so make sure clear policies are in place to address changes in what is expected of employees.

Most importantly, prepare for questions and concerns around wage changes. Consider what issues employees will have and try to address these questions up front. Begin communicating changes as soon as possible so everyone has time to adjust and determine how to move forward.

Make Wage Adjustments as Smooth as Possible

These salary threshold updates have a lot of people concerned about how to meet compliance with the least resistance. This is always a concern when companies are required to make important policy changes, but with the right planning and resources you and your employees can adjust without undue stress.

If you are concerned about how to review and make needed changes, contact HR Service, Inc. to get the help you need to make the process as smooth as possible.

Written by: HR Solutions Team & Penny Clark

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