Earlier this year, the U.S. Department of Labor announced major changes to the Fair Labor Standards Act (FLSA) that caused major ripples across compensation and HR department. The changes largely focused around increasing the wage threshold for exempt status, went into effect in a first stage this July, with the second stage coming this January.
What do the 2025 FLSA changes mean, what are the risks of ignoring them, and how can organizations prepare? We will cover these questions and more in the below guide. Throughout the guide, we will also reference a webinar held by CompTool with subject matter experts in early October 2024.
What Are the Coming Fair Labor Standards Act (FLSA) Changes?
As outlined in an April 2024 press release by the Department of Labor, the core of the 2025 FLSA rule update expands eligibility for overtime pay among lower-paid workers. It raised the salary threshold to be exempt from overtime from $35,568 to $43,888, with another increase to $58,656 scheduled for January 1, 2025.
Anyone under the threshold will not be exempt from overtime, and will receive 1.5x pay for any hours worked over the minimum 40-hour-per-week limit.
Crucially, the rule update also sets a regular timeline by which the threshold will continue to be raised in the future. As Cassandra Faroute, Founder and CEO of Total Reward Solutions, points out in our webinar, “This is not a one-and-done change. Right now, it’s going to change every three years, so this is going to be something that will require constant updates.”
The next potential threshold update will be July 1, 2027. At that point, and every three years after, the threshold will rise to reflect changes in average earnings and prioritize wage fareness for workers within these thresholds.
What the 2025 FLSA Changes Mean for Organizations
At its core, the changes to non-exempt thresholds lead to a decision point for organizations. Assuming that non-compliance is not an option, most employers will face two choices for each role and employee whose wages are between the old and new, higher thresholds:
- Raise the wages of any workers who earned enough to be exempt under the old threshold, but will be eligible for overtime under the new threshold. The new salary level would need to be at least $58,565, while also accounting for future increases starting in 2027.
- Create a plan for paying overtime to workers who fall under the new threshold and will be eligible under the new rule.
There is no single better choice among these two options. Instead, any decision will require careful consideration and analysis of increased labor costs for either option, either through a blanket salary increase or a calculation of how much overtime pay would likely be required. As Paul Reiman from Novo Insights pointed out in our webinar, the costs for the latter option can actually be close to zero if the potential for overtime for newly non-exempt employees is negligible.
Bob Cartwright, Founder and CEO of Intelligent Compensation, added the importance of employee education to the larger point in our webinar. Employees reclassified as non-excempt may feel like they are demoted, even though their eligibility for overtime might actually benefit them. That, in turn, requires thoughtful and intentional communication surrounding any changes to job statuses.
Finally, organizations also need to be prepared for state and local laws in the wake of the FLSA changes that may raise the threshold even further. For example, the state of Washington has announced that it would raise the minimum wage to $16.66 starting January 1, 2025, with exempt thresholds rising to $69,305.60 per year for small businesses and $77,968.80 per year for businesses with more than 50 employees. California announced a similar measure this August, raising the exempt threshold to $68,640 starting in January.
The Risks of Not Adjusting Your Operations
While compliance with the 2025 FLSA changes will be up to every organization, non-compliance after January 2025 is inherently risky. According to the Department of Labor initial reports of noncompliance will not lead to immediate penalties, but instead recommended changes that allow a grace period to get back into compliance.
As with most labor law violations, the Department of Labor will largely rely on confidential complaints from employees to commence investigations. Any organization not in compliance will be required to offer its affected employees both back pay and damages equal to the back pay. However, willful violations will carry exponentially more significant penalties:
Willful violations of the FLSA may result in criminal prosecution and the violator fined up to $10,000. A second conviction may result in imprisonment.
Participants in our webinar also pointed out the broader risks of non-compliance. For example, the Department of Labor’s Duties Test may be designed to arrive at the optimum classification for all employees, but can sometimes result in misclassifying exempt and non-exempt roles. As a result, a more strategic approach to preparing for the new FLSA thresholds will be necessary.
How HR Teams Can Prepare for the FLSA Thresholds
The above-mentioned duties test is a good start. Our webinar participants recommended starting with the low-hanging fruit; as Paul Reiman from Novo Insights pointed out,
“Now is the time to make sure you have looked at everybody classified as extempt with a salary below the new threshold. Start with the simple, and take care of the ones that will immediately fail. And don’t do it with the assumption they’re getting a 3% increase in March; do it based on what they are making today.”
Experts at the Society for Human Resource Management suggest an 6-step process to prepare for the rule change on January 1:
- Closely review the rule to ensure that you understand the threshold, future updates, and potential penalties.
- Identify any current workers who would fall under the new threshold of $58,656 in annual wages.
- Take a close look at the schedule of these employees to determine if they would receive regular overtime pay, and how much.
- Review the job descriptions for any currently exempt positions to ensure that the duties listed fall within the DOL’s rules for exempt workers. This is where the above-mentioned Duties Test comes in.
- Compare the roles and job descriptions of employees in similar roles to ensure consistency in how rules and exempt statuses are applied.
- Intentionally communicate with workers whose status may be changing to ensure that they understand the reasons for the change and the potential benefits for them.
In addition, SHRM also recommends becoming more intentional about overtime to avoid potentially significant overages in pay to newly non-exempt workers. That, in turn, may also require changing other policies, like telecommuting and mobile device usage, to ensure that workers don’t ‘accidentally’ accrue overtime unexpectedly.
The Stakeholders You Need to Involve in the Process
A comprehensive and strategic process includes involving more than just compensation professionals in the adjustment period. In our webinar, Shari Nornes (principal consultant with MorganHR) noted the importance of working with legal departments:
“When we work with a report, we do it with a councel in the room. We explain what we see from the data, then recommend diving deeper into the job to make sure they’re classified correctly by a duties test.”
Our experts also agreed that a ’round table’ solution may be best for stakeholder involvement. Management, legal, HR, and Finance should all be part of the process, with HR and compensation professionals adjudicating the duties while legal can advise on the risks of non-compliance and finance can provide advice on the choice of implementation direction.
At the same time, our experts agreed that compensation professionals still need to drive the ship. Having the most comprehensive background of the 2025 FLSA changes, they will be able to make more informed recommendations to decision-makers across the board.
And of course, the help of the right compensation tool can always be helpful to determine what salary threshold may make sense for your employees. Explore what CompTool can do for you begin to strategically adjust to the coming FLSA changes on overtime exempt status.
No responses yet