On August 30, 2023, the U.S. Department of Labor (“DOL”) announced its proposed watershed rule change to employee exemptions under the Fair Labor Standards Act (“FLSA”). This proposed rule, among other changes, would increase the minimum salary threshold for certain “white collar” exempt employees by nearly $20,000 per year and provide overtime eligibility to millions of additional American workers. 

The DOL’s Current Overtime Rule

There are numerous overtime exemptions available under the FLSA, but the three “white collar” exemptions slated to be changed are the executive, administrative, and professional exemptions. To qualify for these exemptions – and therefore not be entitled to overtime – such employees must satisfy both (i) the applicable duties test; and (ii) the salary basis test: exempt executive, administrative, and professional employees must (currently) earn a guaranteed salary of at least $684 per week, or $35,568 per year.

The current DOL rules also contain a less restrictive duties test for certain “highly compensated” employees (“HCE”) who receive a total annual compensation of $107,432 or more and are paid at least $684 per week.

The DOL’s Proposed Overtime Rule 

If the DOL’s proposed overtime rule is adopted, it would raise the salary threshold for executive, administrative, and professional exempt employees to $1,059 per week. To maintain the exemption from overtime, such employees would need to earn a salary of $55,068 or more per year. If they were to earn less than this new threshold, the employee would need to be paid an overtime premium for any hours worked beyond 40 in a workweek.

The DOL estimates that, in the first year after the rule takes effect, 3.4 million American workers exempt from overtime under the current rules who earn at least the current weekly salary level of $684 but less than the proposed salary level of $1,059 would, without some intervening action by their employers, become newly entitled to overtime under the FLSA.

The proposed salary exemption threshold also contains provisions that update the threshold every three years to reflect the earnings of the 35th percentile of full-time salaried workers in the lowest-wage Census region.

The DOL is also proposing to set the HCE annual compensation level equal to the 85th percentile of earnings for full-time salaried employees nationwide. Thus, the proposed HCE threshold would increase to $143,988 per year, of which at least $1,059 per week (the proposed standard salary level) would have to be paid on a salary or fee basis.

The DOL estimates that an additional 248,900 workers who earn at least $107,432 per year (the current HCE total annual compensation level) and who meet the minimal HCE duties test but not the standard duties test would, without some intervening action by employers, become eligible for overtime if the HCE total annual compensation level were increased to $143,988 per year.

Practical Takeaways 

The DOL’s proposed overtime rule may undergo revisions during the notice and comment period. However, employers wanting to prepare for the potential rule change should consider doing the following:

• Review their employee classifications to determine which of their employees qualify as exempt under the executive, administrative, and professional exemptions. After confirming these employees are properly classified, companies should consider creating a list of any such employee making less than $55,068. If the proposed rule is passed, these employees will either need to be converted to hourly employees, or have their salaries raised to at least $55,068 per year.

• Review payroll and time tracking practices. Some companies whose workforces are entirely salaried may be required to track employee hours worked for the first time ever. Ensuring that any time management software and payroll resources are capable of handling hourly time tracking will prevent companies from scrambling at the last minute to comply with the new proposed rule.

• Review policies and procedures to ensure that rules specifically written for salaried or hourly employees still control behavior as intended if a salaried employee is converted to an hourly employee who is eligible for overtime. Such policies may include those concerning company-issued mobile devices or access to company resources, such as email and chat groups, outside of “regular” work hours.

• Consider training employees who may now be entitled to overtime regarding the company’s policies and practices concerning time worked, recording time worked, rest and meal breaks, timesheet review and approval processes, whether approval is needed to work overtime, and other issues applicable to hourly workers.

Employers who are concerned about the potential impact of the proposed DOL rule should consider contacting their legal counsel. 

Footnotes:

1. For certain other FLSA exemptions, there is no salary basis requirement. For example, there is no salary test required to qualify as an exempt outside sales employee, and certain exempt professionals, including doctors, lawyers, and teachers, are also not subject to the salary tests.
2. Some states have different duties and salary basis tests, and some require a daily overtime premium to be paid.