How the new Department of Labor overtime rule will affect businesses

Joanna Fantozzi

On Tuesday, the U.S. Department of Labor issued a final rule on new overtime requirements and exemptions of overtime eligibility. Starting July 1, the minimum eligibility requirements under the Fair Labor Standards Act will increase from $35,568 to $55,068, or from $684 per week to $844 per week.

On an eight-hour workweek, workers paid $21 hourly or less would now be eligible for overtime compensation, up from $17 hourly during the previous overtime rule. The minimum salary eligibility requirement would go up again on Jan. 1, 2025, to $1,128 per week (equivalent to $58,656 per year, or $28 per hour), and then periodically increase every three years beginning July 1, 2027.

These jumps in eligibility for overtime pay parallel new minimum wage laws being considered and passed around the country, particularly California’s new $20 minimum wage legislation, which just went into effect for quick-service restaurant chains. Experts believe that laws for other industries (or across other states and municipalities) will soon follow, particularly in higher-income areas.

The final rule also exempts executive, administrative, and professional employees from minimum wage and overtime requirements as long as they meet three basic requirements: they have a predetermined (not hourly) salary, and they meet the aforementioned specific salary requirements.

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“This rule is the latest unnecessary and burdensome regulation from the Biden Administration targeting small businesses,” Michael Layman, International Franchise Association senior vice president of government relations and public affairs, said in a statement. “It comes as many entrepreneurs continue to struggle in today’s unpredictable regulatory climate, grappling with lingering inflation, labor challenges, and high costs of goods. Small business owners, especially franchisees, need certainty to operate, and this Administration has provided them anything but predictability.”

Katherine Roberts, a partner with Sidley Austin law firm in Los Angeles, estimates that the new rule will affect four million workers who are exempt from these rules and meet the eligibility requirements for exemption under the new rule:

“The immediate impact will be a financial one, as employers will have to either absorb the salary increases to maintain the same exempt roles, or they will need reclassify the positions as non-exempt,” Robert said.  Employers who choose to make previously exempt positions non-exempt need to consider not only the impact of overtime payments, but also the operational, training and compliance costs.”

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Roberts suggests that business owners get outside legal assistance in making sure they are following these new laws (along with other changing labor legislation) correctly, and to make sure they don’t neglect “hidden” training costs of changing employees from hourly to salaried, or vice versa.

Contact Joanna Fantozzi at [email protected]