On August 30, 2023, the Wage and Hour Division of the U.S. Department of Labor (DOL) released a Notice of Proposed Rulemaking (NPRM) to revise the “white collar” overtime exemption regulations applicable to executive, administrative, and professional employees. The DOL proposes to substantially increase the minimum salary level needed to qualify as exempt. While the exact salary level that would be included in a final rule is not yet known, it is expected that the salary level will be at least $1,059 per week ($55,068 annualized).
Salary Level. The DOL proposes to set the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). In contrast, the current $684 per week ($35,568 annualized) salary level was established in 2019 based on a much lower metric – the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region and in the retail industry nationally. Using data from 2022, the DOL reports that using the 35th percentile would cause the salary level to jump more than 50%, to $1,059 per week ($55,068 annualized). The DOL claims, however, that when it promulgates the final rule it will use the most recent data then available. This could result in a salary level much higher than $55,068. For example, the DOL projects that by the fourth quarter of 2023, the salary threshold could be as high as $1,140 per week ($59,285 annualized), and that by the first quarter of 2024, the salary threshold could be as high as $1,158 per week ($60,209 annualized).
HCE Test. The DOL also proposes to significantly raise the total annual compensation needed to qualify for exemption under the streamlined test for highly compensated employees (the “HCE test”). Currently, employees with total annual compensation of $107,432 qualify for exemption under the HCE test. That figure was calculated in 2019 using the 80th percentile of full-time salaried workers nationally. Under the proposed rule, the amount needed to qualify for the HCE test would be based on the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally. Based on 2022 data, the DOL reports that the HCE test would require total annual compensation of $143,988. Again, however, the DOL indicates that it will use the most recent data available at the time the final rule is promulgated, which may lead to a much higher annual threshold.
U.S. Territories. The proposed rule would apply the increased salary level to employees in all territories that are subject to the federal minimum wage (including Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands, where the salary level is currently just $455 per week). The rule would set a special salary level for American Samoa, equal to 84% of the general salary level, up from the current $380 per week threshold.
Immediate Impact. The DOL estimates that more than 3.4 million currently exempt employees who earn at least the current salary level of $684 per week would be impacted by the rule in its first year.
Automatic Updates. The proposed rule would include triannual updates to the salary levels. Every three years, the DOL would update the salary levels using the same methodologies described above, using the most recently available four quarters of data as published by the Bureau of Labor Statistics. The new salary levels would be published at least 150 days before they take effect. The rule would allow the DOL to temporarily delay a scheduled automatic update where unforeseen economic or other conditions warrant.
Motion Picture Industry. The DOL permits employers to classify as exempt employees in the motion picture producing industry who are paid a specified base rate per week (or a proportionate amount based on the number of days worked), so long as they meet the duties tests for the EAP exemption. The proposed rule would increase that base rate from $1,043 per week to $1,617 per week.
No Change to Duties Tests. In addition to meeting specific compensation requirements, employees generally must meet certain tests regarding their job duties for an exemption to apply. Significantly, the proposed rule would not make any changes to the duties tests for qualifying as an exempt executive, administrative, or professional employee.
DOL Leadership. Notably, the DOL chose to proceed with the NPRM despite not having a Senate-confirmed Secretary of Labor at the helm (proceeding instead with Acting Secretary of Labor Julie Su) and a vacancy at the Administrator position at the Wage and Hour Division (proceeding instead with Principal Deputy Administrator Jessica Looman). It is anticipated that the DOL’s attempt to promulgate regulations in the absence of a Secretary of Labor will be subject to legal challenge.
Potential Salary Basis Challenge. Another potential challenge to the proposed rulemaking was foreshadowed in February 2023 by Justice Brett Kavanaugh in his dissenting opinion in Helix Energy Solutions Group, Inc. v. Hewitt, 598 U.S. 39 (2023). Justice Kavanaugh stated that the Fair Labor Standards Act focuses on whether the employee performs exempt duties, “not how much an employee is paid or how an employee is paid.” According to Justice Kavanaugh, “it is questionable whether the Department’s regulations—which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the Act.”
Comments. Comments on the proposal are due 60 days after its official publication in the Federal Register. The DOL states that it will consider all comments received before publishing a final rule. Littler Workplace Policy Institute (WPI) will keep readers apprised of relevant developments.
