The Federal Fair Labor Standards Act (“FLSA”) codifies the employment relationship as it relates to the payment of wages. Under the FLSA, employees generally must be paid an overtime rate of 1.5 times their regular rate of pay for all hours worked beyond 40 in a workweek. Paying overtime compensation to salaried employees is subject to certain exemptions and threshold requirements. 

The FLSA exempts certain administrative, executive, and professional employees from its minimum wage and overtime payment requirements so long as specific conditions are met, one of which is that the employee must be compensated on a salary or fee basis at no less than the established salary level. For a number of years, the exempt salary threshold has been $684 per week ($35,568 per year), although the United States Department of Labor (“DOL”) has threatened on several occasions to revise this figure upwards. On August 30, 2023, the DOL announced that it intends to significantly raise the exempt salary threshold from $684 per week to $1,059 per week. This means an employee will need to earn $55,068 or more per year to be exempt from FLSA overtime requirements.

In addition to raising the salary threshold, the proposed rule would make the following changes to the enforcement of the FLSA:

• The rule would automatically update the salary threshold every three (3) years;

• The rule would raise the threshold for the “highly compensated employee” exemption from $107,432 to $143,988; and

• The rule would restore the application of these salary thresholds in United States territories subject to federal minimum wage standards, a practice that ended in 2019.

The Labor Department’s proposed new overtime rule is not yet law. It must first go through a sixty-day notice and comment period during which interested parties can provide their input about the proposal. Once the comment period ends, the Department of Labor is required to review suggested revisions to the rule before it becomes final.

While this process is expected to take several months, employers would be well advised to evaluate and potentially adjust their pay practices as legal analysts expect the DOL to prioritize and ultimately finalize this proposed rule, which it anticipates would impact 3.6 million workers. Make a list of all exempt employees who are currently earning between $35,568 and $55,068 per year and determine whether their salary should be raised to meet the new threshold or, alternatively, whether it makes economic sense to convert them to non-exempt status. Key to that determination is how much overtime pay the employer anticipates it will be remitting to the newly non-exempt employee. It is a good idea to begin tracking their actual hours worked so that an informed decision can be made about the potential impact of converting their status if/when the new rule goes into effect.

It is worthy of note, however, that this is not the first time we have been down this road. In 2016 the Obama administration attempted to raise the salary level to over $900 per week. After business-friendly interests in Texas successfully filed suit to block the rule from taking effect, a change in presidential administration led to an abandonment of the proposed rule. Those oppositional interests are likely to rely on Supreme Court Justice Brett Kavanaugh’s February 2023 dissent in the case of Helix Energy Solutions Group, Inc. v. Hewitt case in which he argued that the DOL does not have statutory authority to issue a salary-basis or salary-level test. In that case, a high-earning worker making more than $200,000 a year was deemed eligible for overtime pay because he was paid a guaranteed daily rate and thus could not satisfy the salary basis test.

Stay tuned as this proposed rule moves through the review and comment period. We will continue to monitor its status and provide additional takeaways and advice on best practices to implement in the event this proposed rule becomes the law of the land.