If you spent the second half of 2024 scrambling to raise salaries or reclassify employees ahead of a federal overtime rule that was supposed to phase in a $58,656 salary threshold, you can stop bracing for the second phase. It's not coming. On May 14, 2026, the Department of Labor made it official: the 2024 overtime rule is dead, and the salary threshold for exempt employees has reverted to $684 per week — the same number that's been in place since 2019.
For small business owners who never got around to reclassifying anyone, this is a non-event. For the ones who did — who bumped a store manager's salary to $844 a week just to keep them exempt, or moved an assistant office manager onto an hourly timesheet because the math didn't pencil out — this is a decision point. Do you undo it? Can you? And what actually applies now that the federal rule is settled but a growing list of states have their own, much higher numbers?
What Just Happened, in Plain English
The short version: a rule that already wasn't being enforced just got formally erased.
In April 2024, the DOL finalized a rule raising the standard salary threshold for the "white collar" overtime exemptions (executive, administrative, and professional employees) in two steps — first to $844 per week ($43,888/year) on July 1, 2024, then to $1,128 per week ($58,656/year) on January 1, 2025. It also added automatic inflation-linked updates every three years.
That second increase never took effect. On November 15, 2024, a federal judge in the Eastern District of Texas vacated the entire rule nationwide, ruling that the DOL had overstepped its authority. The court's reasoning is worth understanding because it shapes what comes next: overtime exemption status under the Fair Labor Standards Act (FLSA) is supposed to hinge primarily on an employee's actual job duties, not their paycheck. By raising the salary floor so aggressively, the court found, the DOL had effectively made salary the deciding factor — squeezing out employees who genuinely perform exempt-level executive or professional work but don't clear an arbitrary income bar. The court also rejected the automatic three-year escalator as exceeding the agency's rulemaking authority.
The rule was legally dead from that point, but the regulatory text describing it still sat in the Code of Federal Regulations — a kind of zombie provision. The DOL's May 2026 action is a technical amendment that formally strips that language out and restores the pre-2024 regulatory text, with the $684/week threshold as the operative federal standard.
The numbers that matter now, at the federal level:
| Exemption category | Threshold |
|---|---|
| Standard salary level (executive, administrative, professional) | $684/week ($35,568/year) |
| Highly compensated employee (HCE) exemption | $107,432/year |
If you paid a manager $684 a week or more, correctly classified their duties as exempt, and didn't touch anything in response to the now-dead 2024 rule, nothing changes for you.
The Duties Test Still Does the Real Work
The salary threshold gets all the headlines because it's a clean number, but it's only half of the exemption test — and it's the smaller half. To classify an employee as exempt from overtime under the executive, administrative, or professional categories, they need to clear both:
- The salary basis test — paid a fixed salary (not hourly), at or above the threshold, that doesn't fluctuate based on hours or quality of work
- The duties test — their actual day-to-day responsibilities meet the specific standard for their exemption category
The duties test is where most small business misclassification problems actually live, and it didn't move at all in this reversal. A few reminders, because "salaried" and "manager" are not magic words:
- Executive exemption requires managing the business (or a recognized department), regularly directing at least two full-time-equivalent employees, and having genuine authority to hire, fire, or meaningfully influence those decisions.
- Administrative exemption requires office or non-manual work directly related to management or general business operations, plus the exercise of discretion and independent judgment on significant matters — not just following a detailed procedure manual.
- Professional exemption generally requires advanced knowledge in a field of science or learning, usually acquired through specialized education (think CPAs, attorneys, licensed engineers) — or, for the "creative professional" branch, work requiring invention, imagination, or talent.
A title like "Assistant Manager" or "Office Coordinator" proves nothing on its own. The DOL and plaintiffs' employment attorneys look at what the person actually does most of the time. This is the piece that's easy to overlook when the news is all about a dollar figure.
If You Reclassified Employees in 2024, Should You Undo It?
This is the question we're hearing most from small business owners, and the honest answer is: it depends, and it's worth 30 minutes with an employment attorney before you act — not because the law is unclear, but because the consequences of getting it wrong twice are worse than the consequences of leaving things alone.
A few factors to weigh:
Reverting an exempt-to-hourly employee back to salaried/exempt. If you moved someone to hourly pay and overtime eligibility in mid-2024 to stay ahead of the rule, and their duties genuinely satisfy the executive/administrative/professional test, you can generally reclassify them back to exempt now that the salary floor has dropped to $684/week. But do this carefully and in writing — a poorly communicated reclassification reads to employees (and to the DOL, if there's ever a complaint) as an attempt to dodge overtime pay, not a compliance correction. Document the duties analysis, not just the pay change.
Rolling back a salary increase. If you raised someone from, say, $700/week to $845/week specifically to clear the (now-vacated) 2024 threshold, cutting that pay back is legally possible but is a real morale and retention risk. Many employers who granted the raise are choosing to keep it rather than claw back compensation — the goodwill cost usually exceeds the payroll savings for a single employee.
State law may have already made the federal reversal moot. This is the part that trips people up. The federal threshold is a floor, not a ceiling. Where a state sets its own higher salary requirement for exempt status, employers in that state must meet the higher number regardless of what the DOL just did. Several states are already well north of $684/week for 2026, including:
| State | 2026 exempt salary threshold (approx.) |
|---|---|
| Washington | $1,541.70/week (~$80,168/year) |
| California | $1,352.00/week (~$70,304/year) |
| Colorado | $1,111.23/week (~$57,784/year) |
| New York (NYC, Nassau, Suffolk, Westchester) | $1,275.00/week |
| New York (rest of state) | $1,199.10/week |
If you operate in one of these states — or any state with its own exempt salary rule, since several others sit meaningfully above $684 as well — the federal rollback changes essentially nothing about your obligations. Always apply the higher of the federal and state number for each employee's work location.
The Compliance Risk Small Businesses Actually Face
Overtime misclassification is one of the most common — and most expensive — wage-and-hour claims against small employers, and it rarely comes from a single disgruntled employee. FLSA collective actions let one misclassified employee's complaint expand into a claim covering everyone in the same role, going back up to three years for willful violations. Back overtime, liquidated (double) damages, and attorney's fees add up fast, even for a business with a handful of employees.
The practical takeaway from this whole episode isn't "the threshold went back down, we're fine." It's a good forcing function to actually audit your exempt roster:
- List every employee currently classified as exempt. For each one, confirm they clear the higher of the federal $684/week or your state's threshold.
- Re-run the duties test for each exempt employee, not just the salary check. Job descriptions drift over time; what someone was hired to do and what they actually spend their week doing can diverge within a year.
- Check your state and local rules specifically — don't assume the federal number is the one that governs. A handful of cities layer on additional requirements beyond the state floor.
- Document the analysis, not just the conclusion. If a classification is ever challenged, "we checked the salary and duties test in [month/year] and here's the record" is a materially stronger position than no paper trail at all.
Where This Connects to Your Books
Payroll misclassification isn't just an HR risk — it's an accounting one. Overtime liability that surfaces later (from an audit, a complaint, or a policy change like this one) needs to be reflected in your books as an accrued liability the moment it becomes probable and estimable, not discovered as a surprise when a settlement check goes out. If your payroll categories in your chart of accounts don't cleanly separate exempt salaries from hourly wages and overtime, retroactive corrections turn into a multi-week reconciliation project instead of a clean adjusting entry.
This is one of the underrated advantages of keeping your books in a structured, version-controlled format rather than a black-box payroll export: every reclassification, pay change, and accrual is a discrete, auditable entry you can trace back to the date and reason it happened — useful for your own records, and invaluable if a regulator or auditor ever asks you to reconstruct the history.
Simplify Your Financial Management
Regulatory whiplash like this overtime rule reversal is a good reminder that clean, well-organized books make every compliance question easier to answer — whether it's payroll reclassification, an audit request, or year-end tax prep. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.