The U.S. Department of Labor (DOL) proposed rules on August 30, 2023, to raise the salary threshold level necessary to exempt certain employees from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay requirements. The proposal would increase the salary threshold by nearly $20,000 from the current amount of $35,568 per year ($684 per week) to $55,000 per year ($1,059 per week).

Notably, in the 260+ pages accompanying the proposed regulations, the DOL never commented on a case that is currently pending in the Western District of Texas challenging whether the DOL even has the authority to mandate a salary threshold for employees to satisfy in order be exempt. This is surprising. Last year, during oral argument at least two Supreme Court Justices questioned whether the DOL has such authority, with one Supreme Court Justice stating that there is "a strong argument that the [FLSA overtime] regs [requiring a salary threshold] are inconsistent with the statute.”

The DOL’s Proposal

The DOL’s proposed rules have four key components:

• The salary threshold for executive, administrative and professional employees is to increase from $684 per week ($35,598 per year) to $1,059 per week ($55,000 per year). However, the salary threshold does not apply to teachers, medical doctors and lawyers, which is consistent with the current FLSA regulations. The proposed rule also raises the salary threshold for executive, administrative and professional employees in American Samoa to $890 per week.
• The DOL also increased the total annual compensation level to be exempt from overtime and minimum wage requirements under the FLSA’s “highly compensated employee” exemption from $107,432 to $143,988 per year.
• The DOL proposal includes an automatic escalator in which the minimum salary and highly compensated employee thresholds would automatically increase every three (3) years.
• The proposed rule also raises the minimum base rate threshold for overtime exemption in the motion picture industry from $1,043 per week to $1,617 per week, provided such individuals satisfy the duties test of the executive, administrative or professional exemption.

The proposed rules do not change how or when an employer can count nondiscretionary bonuses and incentive payments towards a portion of the salary threshold level. Currently, under the FLSA, employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary threshold level provided that such monies are paid at least annually. If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given 52-week period to retain his or her exempt status, the DOL also permits a “catch-up” payment at the end of the 52-week period.

Thresholds Vary by State

It is also important to remember that many states have their own salary thresholds for exempt status and these thresholds are not impacted by the DOL’s proposal. For example, New York’s salary threshold for businesses in New York City and Nassau, Suffolk, and Westchester Country is $1,125 per week ($58,500 per year). This means that in New York City and its surrounding counties, in order to classify employees as exempt under the executive/managerial or administrative exemption, the employer must pay the employee a salary of at least $1,125 per week. Similarly, in California the salary threshold exceeds the federal minimum at $1,240 per week ($64,480 per year).

Further, some states, including New York and California, do not permit employers to use non-salary remuneration, such as commissions or nondiscretionary bonuses, to satisfy the salary threshold. Therefore, it is imperative that employers work with counsel to ensure that they are paying the correct salary to exempt employees under applicable state law.

Next Steps

The publication of these proposed rules starts a 60-day comment period in which the public will have the opportunity to opine on the proposed rules. Once the comment period ends, the DOL will take such comments into account and publish final rules that should become effective 60-days after publication.

Finally, employers should remember that paying an employee more than the DOL-mandated salary threshold does not automatically exempt them from FLSA requirements and other salary laws that vary by state. Meeting the relevant job duties test is also as necessary as satisfying the applicable salary levels in determining overtime exemptions.

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