AGB Policy Alert: U.S. Department of Labor Issues New Overtime Rule

On April 26, 2024, the U.S. Department of Labor (DOL) issued a new rule regarding “exempt” and “nonexempt” employee status under the Fair Labor Standards Act (FSLA). The new rule revises the standard salary threshold and will classify more workers as nonexempt and therefore eligible for overtime pay. The threshold will be raised beginning July 1, then again on January 1, 2025.

This development could have serious financial implications for some higher education institutions as well as associated foundations. Boards should be aware of the change and work with senior administrators to understand the implications and respond appropriately.

What Board Members Need to Know

How exemption works: To consider an employee as exempt, and therefore ineligible for overtime pay, the employee’s job must meet three criteria:

The employee must be paid a fixed salary (not hourly).
The employee’s salary must meet a minimum amount.
The employee’s job duties must primarily be executive, administrative, or professional in nature.

The change: The updated rule raises the annual salary threshold from $35,568 to $43,888 on July 1, and then to $58,656 on January 1, 2025. Employers must either reclassify the affected employee as nonexempt or raise their salary to the new threshold.

In addition, the new rule indicates that the salary threshold will increase automatically every three years, beginning July 1, 2027.

Why This Matters

The rule is expected to be challenged in court, but perhaps not until it goes into effect. Boards and senior administrators should not hold out and wait to see if a court will block the rule. Preparation is critical even if a legal challenge blocks the rule from going into effect.

The rule will likely increase labor costs and union contracts. Depending on the number of employees, an institution, system, or foundation could pay more either in fixed salaries or overtime pay. The DOL expects employers will adjust wages or hours to comply with the rule.

Institutions with labor unions may anticipate renegotiating contracts sooner than anticipated.

This rule could disrupt morale. While many affected employees will certainly welcome the rule given the increased pay, others may feel less valued if they are reclassified from exempt to nonexempt status. The reclassification between “white collar” and “blue collar” work can have as much impact as promotions and title changes.

Likewise, students and employees may protest decisions to eliminate staff to comply with the rule.

Programs and services may need to adjust given staffing changes. Student-facing offices and other programs may need to adjust to reflect staffing realities.

Questions for Boards

How many employees will be affected by the new rule?
How will labor and personnel costs change after the rule’s implementation?
What union contracts may be affected and should we anticipate new negotiations based on the rule change?
What does the rule mean for our financial outlook?
What policies or strategies may need to change in response to the rule?