Late in August, the Department of Labor announced that it had proposed a new rule for the white collar overtime exemptions of the Fair Labor Standards Act (FLSA). In essence, the proposed rule seeks to substantially increase the salary requirements that allow employers to exempt a worker from the entitlement to premium overtime pay under the FLSA.
As background, the FLSA generally requires employers to pay employees a premium overtime rate (i.e., 1.5 times the regular rate of pay) for all hours over 40 worked in a week. The FLSA exempts from this requirement bona fide executive, administrative, and professional employees. In order to qualify for these exemptions, the employee must be 1) paid on a salary basis, 2) receive a threshold minimum salary amount, and 3) their job position must involve certain specific duties set out in FLSA regulations.
Currently, a worker’s salary must be at least $684/week ($35,568 per year) in order to meet the salary threshold for exemption from overtime pay under these white-collar exemptions. The rule proposed by the DOL seeks to increase this salary threshold considerably to $1,059 per week ($55,068 annually), to be considered exempt from overtime pay going forward. The DOL used as the basis for this salary figure, the 35th percentile of the weekly earnings of full-time salaried workers in the lowest wage-earning census region. This is a much higher percentile than has been used in the past to choose the proper salary threshold for white-collar overtime exemptions. In 2019, for example, when the salary threshold was last increased, the DOL used the 20th percentile of weekly earnings as the proper figure to use as the exemption.
In addition to increasing the salary threshold for white collar exemptions, the proposed rule also calls for an increase in the pay which qualifies a worker the highly compensated employee exemption. Under the current test, employees who earn a total annual compensation of $107,432 per year are exempt from the overtime rules, irrelevant of their duties. The DOL’s proposed rule seeks to increase this threshold to $143,988, which is the 85th percentile of full-time salaried workers, according to 2022 data.
The DOL estimates that these proposed salary thresholds, if finalized would extend overtime protections to nearly 4 million new workers.
The proposed rule also calls for regular, automatic updates to the salary thresholds. According to the proposal, the DOL would automatically update salary levels every 3 years based then-current wage data using the same percentiles described above. This means that in 2026, the DOL would reassess the salary threshold for executive, administrative, and professional employees, and calculate a new salary requirement equal to the 35th percentile of full-time salaried workers based on data available at the time. Employers would have at least 150 days’ notice of such new salary levels, and the DOL would have the discretion to delay an automatic update if economic or other conditions suggest the need for a delay.
Comments on the propped rule are due on or before November 7, 2023.
What should employers do now? At this point the most prudent course for employers may be to make a preliminary assessment of who might be affected by new thresholds if they pass, but otherwise just to sit tight and monitor developments.
It is important to keep in mind that the salary thresholds set forth in the proposed rule remain subject to change. The DOL has made clear that any final rule will be based on the most recent salary data available. This means, for example, that if the 35th percentile of salaried workers is greater than $55,068 per year when the rule is finalized, then the salary thresholds for the white-collar exemptions will actually be higher than currently set out in the proposed rule. In that case, employers could end up having to pay employees more than the proposed currently states in order to exempt them from the right to overtime premium pay.
History also tells us that the final salary threshold may end up being lower than is currently proposed. The salary increase that ended up becoming law in 2019 was actually lower than the DOL had earlier suggested in its proposed rule. As a result, many employers who changed compensation based on the proposed rule, ended up increasing employee salaries beyond what they needed to for the exemptions to apply.
Many legal scholars also believe that there may be a constitutional challenge to these proposed regulations on the grounds that the DOL only has the authority to determine the duties requirements of the FLSA overtime exemptions, not the salary threshold.
For all of these reasons, employers may want to wait to make any official changes to employee salaries until the threshold are finalized and all legal challenges have played out. If employers act too quickly, they might end up having to make multiple changes to employee compensation to avoid the entitlement to overtime.
While we wait, employers are well-advised to assess current exempt status of their employees and begin evaluating a plan for whether and whose salaries may need to be adjusted in order to retain this status going forward when and if the proposed rule officially becomes law. Employers should also start considering the financial impact of increasing salaries, as well as the extent and likelihood of overtime hours and pay if salaries are not increased to new threshold, so that employers can assess whether in the end, it is actually worth making adjustment to retain exempt status of their employes.
Of course, employers should always seek guidance from counsel if it has any question about how to proceed.