Just in time for Labor Day, the U.S. Department of Labor (DOL) on Aug. 30, 2023, announced a proposed rule raising the overtime exemption salary threshold for white collar workers. The proposed rule addresses the overtime exemption for executive, administrative and professional employees. Currently, such workers must earn at least $35,568 annually to qualify for the exemption. The proposed rule would raise the threshold to $55,068. The highly compensated employee (HCE) exemption also is being increased under the proposed rule from its current level of $107,432 to $147,414 per year. The rule would also include automatic updates, bumping up the threshold with inflation every three years.

Basics of the White Collar Overtime Threshold

The Fair Labor Standards Act requires employers to pay time and a half for their workers' hours above 40 per week. Exempt from this requirement, however, are employees "employed in a bona fide executive, administrative, or professional capacity."¹

For many decades, DOL has used a three-part test for this exemption. Each of its rulemakings has adjusted the contents of each part of the test, but the three-pronged framework has remained the same: An employee must 1) perform exempt duties, 2) be paid a fixed salary and 3) be paid a high enough salary.

This third prong is the "salary threshold" test. Its predominant rationale has been to serve as a proxy for an employee's status as a bona fide executive, administrator or professional. The idea is that an employee truly charged with those duties would likely have a salary commensurate with those duties.

The Overtime Saga

In 2004, DOL issued an overtime rule that substantially simplified the duties prong of the test and set a salary threshold of $23,660. It also introduced a "highly compensated employee" salary threshold for employees who perform at least some white collar duties.

In 2016, DOL issued an ambitious rule that would have raised the salary threshold to $47,476. It would have also included, for the first time, an automatic-update mechanism. That rule, however, was held invalid by a federal district court on grounds that the salary threshold was too high and, thus, contrary to the statue – it swallowed up millions of workers who indeed performed executive, administrative and professional functions. The court also held that the automatic-update mechanism was unlawful.

In 2019, DOL issued a more moderate overtime rule. That rule promulgated the current $35,568 threshold. Essentially, it used the same methodology as the 2004 rule and simply updated it for inflation. The 2019 rule did not provide for automatic updates.

The Newly Proposed Rule

On Aug. 30, 2023, DOL announced a proposed overtime rule. It has yet to be officially published in the Federal Register but will be soon. Once that occurs, the 60-day period for filing public comments will begin.

The new rule does not revisit the duties test. Its major features are similar to that of the 2016 rule:

• a substantial increase in the salary threshold, from $35,568 to $55,068
• a substantial increase in the "highly compensated employee" threshold, from $107,432 to $144,414 (with use of commissions, nondiscretionary bonuses and incentives to cover up to 10 percent)
• a mechanism for automatic updates every three years to keep pace with inflation

DOL estimates significant effects to employers from the new rule, with 3.65 million workers newly eligible for overtime:

• "3.4 million workers exempt under the current regulations 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 protection under the FLSA."²
• "[A]n 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 the proposed level of $143,988 per year."³

Conclusion

Time will tell whether the final rule remains as ambitious as the proposed rule – and whether it will survive any court challenges. In the meantime, employers should prepare for these potential leaps in the minimum salary thresholds. Employers not prepared to give an employee a raise in compensation sufficient to meet the proposed salary thresholds (a raise that could be upward of $375 per week) should review those employees' hours of work to estimate future overtime costs or consider whether their work can be redistributed in a manner to reduce their need for overtime hours. The fluctuating workweek method of paying the newly nonexempt employees overtime also may be a cost-savings option for some employers. Finally, interested employers have an opportunity to submit comments to the DOL on the proposed rule.

Notes

¹ 29 U.S.C. § 213(a)(1).

² Frequently Asked Questions - NPRM: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees.

³ Frequently Asked Questions - NPRM: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees.