The New Overtime Rule

Recently, the Department of Labor (DOL) released its final overtime rule: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, effective July 2024. The rule, which expands overtime protections, increases the minimum salary thresholds required to exempt a salaried bona fide executive, administrative, or professional employee (EAP) from federal overtime pay requirements — which are currently in place to ensure that employees who work more than 40 hours a week are compensated 1.5 time the regular amount they are normally paid.

In other words: If an HVAC contractor has employees who used to be exempt from overtime rules but are below the new threshold, they’ll need to either be paid overtime or given a raise so they’re once again exempt.

The increase in salary threshold has the biggest impact to HVAC contractors, as the final rule increases the standard salary level for exemption, and the total annual compensation requirement for Highly Compensated Employees (HCEs).

The response to the new overtime rule from ACCA members in particular has been mixed, according to Kate Wessels, vice president of communications, marketing, and partnerships at the Air Conditioning Contractors of America (ACCA).

“Many contractors have expressed concern about the increased operational costs and the additional burden of having to make changes to comply with the new regulations,” Wessels said. “Smaller contractors, in particular, are worried about the impact on their profitability and the potential need to pass on some of these costs to customers, which could affect their competitiveness.”

This huge increase in salary for exempt employees does mean that more HVAC employees would be eligible for overtime, resulting in an increase of labor costs for HVAC businesses that in turn, affects the bottom line.

“It's worth mentioning that these kinds of changes that come out of federal agencies are driven by politics … It is worth knowing that the agencies that deal with workplace, such as the Department of Labor, very much do reflect the political philosophy of whoever's occupying the White House,” Duncan said.

These employees must also satisfy the duties tests that define what constitutes an EAP employee. These duties tests are not affected by the new overtime rule.

The rule increases the standard salary threshold for those exempt EAP employees from its current pay of $684/week ($35,568 annually) to $844/week ($43,888 annually), starting on July 1, 2024. The next increase goes into effect on January 1, 2025, and will increase the threshold for those employees to $1,128/week ($58,656 annually).

On July 1, 2024, the HCE total annual compensation threshold increases from $107,432 annually (including at least $684/week paid on a salary or fee basis) to $132,964 per year (including at least $844/week paid on a salary or fee basis). On January 1, 2025, the requirement will increase to $151,164 per year (including at least $1,128/week paid on a salary or fee basis).

But wait — there’s more. Starting July 1, 2027, salary thresholds will update every three years, by applying up-to-date wage data to determine new salary levels.

Implications for HVAC Businesses

This new overtime rule has huge impacts on both small and large HVAC businesses. After all, it does mean the potential increase of a number of employee salaries, or paying them overtime.

“For small business owners, the primary concern is the potential increase in labor costs,” said Wessels. “Small businesses often operate with tighter margins, and the requirement to pay overtime to a broader category of employees might strain their financial resources.”

Depending on the state of a small HVAC business, this could lead to difficult decisions regarding reducing employee hours or raising service prices in order to adjust to any increased salaries, or even reducing services offered.

“Larger HVAC businesses, while potentially more financially resilient, will still face increased labor costs,” Wessels said. “However, they might be better positioned to absorb these costs due to their larger revenue streams and more substantial financial reserves. They may also have more resources to invest in efficiency-improving technologies and processes that can offset some of the increased labor costs.”

With less than a month to prepare for these increases, any and all HVAC contractors need to know exactly what (EAP) employees are getting that salary bump — or getting paid overtime.

“There are two aspects to what constitutes a salaried and exempt [EAP] employee,” Duncan said. “A salaried, exempt employee is someone who receives a guaranteed salary and whose duties qualified them to be paid a guaranteed salary as opposed to being paid by the hour.”

Non-exempt employees are the opposite — those employees who are hourly workers and whose duties do not qualify as exempt, and who are paid hourly (at least minimum wage) and receive overtime.

According to the Federal Register, “Since 1940s, the regulations implementing the EAP exemption have generally required that each of the following three tests must be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test)."

The final rule updates and revises the regulations issued under section 13(a)(1) — included in the original FLSA Act of 1938 — implementing the exemption, often described as the “white-collar” exemption, from minimum wage and overtime pay requirements for EAP employees (as those terms are defined in the Department’s regulations at 29 CFR part 541).

“The duties tests have not changed … What has changed is the required minimum salaries [for EAP employees], and that’s really where [HVAC] employers can get into a jam,” Duncan said.

The three employee exemption categories — executive, administrative, and professional — have salaries that are paid on a regular basis of a predetermined amount that cannot be reduced because of variations in the quantity or quality of the employee’s work.

Executive employees are those whose primary role is management.

“And the easiest definition for what constitutes management is that the individual customarily and regularly directs the work of two or more other [full-time] employees,” Duncan said. Someone in this position also has the authority to hire or fire other employees, or their suggestions are given a great deal of consideration.

Often times those decisions are reserved for the very top of the business, like the owners.

“The Department of Labor does recognize that, meaning that even if the [executive employee] is not unilaterally making the decisions — if her or his recommendations are given great weight — then that person may qualify for the executive exemption along with the [increased] salary,” Duncan said.

How to Prepare

To prepare for this rule change and the adaptations to come, HVAC contractors need to take a couple key steps. For starters, they’ll have to review and possibly adjust their budgets and staffing plans, implement new management techniques, communicate with their employees, and then some. To mitigate risks, Wessels recommended that HVAC contractors conduct a thorough review of staffing needs and schedules to minimize overtime where possible.

Since many technicians are already working overtime, especially in peak seasons, HVAC business owners might be forced to reassess staffing schedules in order to comply with this new rule (ensuring they accurately track hours worked), while never missing a beat with customers.

“This might involve hiring additional staff or redistributing workloads to ensure that no single employee is consistently working overtime,” Wessels said.

According to the Heating, Air-conditioning & Refrigeration Distributors International (HARDI), employers will have to review and adjust their payroll practices to ensure compliance, which may involve salary adjustments or employee reclassification.

To do this, HVAC contractors will have to take the appropriate measures to thoroughly track employee hours.

“Invest in time-tracking and management tools to monitor employees' hours more accurately,” Wessels said. “This can help in ensuring compliance with the rule and identifying patterns where overtime is most frequent.”

And failure to comply won’t fare well for HVAC contractors.

“The DOL emphasizes strict compliance with the updated salary thresholds,” according to HARDI. Therefore, HVAC contractors should maintain accurate records to conduct thorough audits in order to avoid any potential penalties; and then, if needed, promptly address discrepancies.

It comes down to mitigating potential risks of the new rule. These reviews don’t stop at employee hours. The potential financial impacts take the same amount of effort.

“Prepare for the financial impact by reviewing budgets and forecasting potential changes in labor costs,” Wessels said. “Consider adjusting pricing strategies or finding other areas where costs can be reduced without compromising service quality.”

Like arguably every aspect of the HVAC industry, communication is key. If contractors want to adapt smoothly to changes, they have to keep their people in their loop.

“Maintain open lines of communication with employees about the changes and how the business plans to comply with the new rule,” Wessels said. “Transparency can help in managing expectations and maintaining morale.”

With any big change comes a rise in complaints. The new overtime rule is no exception. For contractors seeking a peace of mind through professional advice, they can and should consult with the necessary experts.

“Consult with human relations (HR) professionals or legal experts to ensure full compliance with the new regulations and to understand any exemptions or special provisions that may apply to your business,” Wessels said.