Department Announces Proposal to Extend Overtime Pay to Millions of Workers
On August 30, 2023, the United States Department of Labor (DOL) announced a new proposed rule that would make approximately 3.5 million more workers eligible for overtime pay. Like other recent similar proposals, this one is aimed at raising the minimum salary requirements associated with the “white collar” exemptions to the minimum wage and overtime requirements in the Fair Labor Standards Act (FLSA).
As most employers already know, three hurdles must generally be cleared for an employee to be exempt from the FLSA’s overtime requirement: (1) the worker must perform qualifying job duties; (2) the worker must be paid on a salary (or other qualifying) basis; and (3) the worker’s salary must be higher than the minimum threshold, which is currently $684 per week ($35,658 per year).
Here is a summary of what the DOL wants to accomplish through this proposed rule:
- Raise the minimum salary to match the 35th percentile of earnings of full-time salaried workers in the lowest-wage census region in the United States (currently the South). Based on current data, this would raise the minimum salary level to $1,059 per week ($55,068 per year). Because the goal is to marry the salary increase to a particular earnings percentile when the rule takes effect, the actual minimum salary will probably be higher than $55,068 when the rule takes effect, likely something closer to $60,000 per year.
- Increase the highly compensated employee exemption level from $107,432 per year to $143,988 per year, an increase of almost 35 percent. This represents the 85th percentile of annual earnings for full-time salaried workers nationally.
- Automatically update those levels every three years. The goal is to keep the salary minimums tied to the respective percentiles noted above on a going-forward basis.
Fortunately, the DOL is not proposing any changes to the “duties” test or the “salary basis” requirement (#1 and #2 above), which will make it easier for companies to identify which employees may be impacted by the new rule.
If this all sounds familiar, that’s because it is. In 2019, President Obama’s administration tried to implement similar aggressive changes to the FLSA’s overtime rules. Those changes were successfully challenged in court and were the subject of an ongoing appeal before ultimately being scrapped by President Trump in favor of the salary levels currently in place.
So, what’s next for the rule? Right now, it is only a proposal. The DOL will accept comments from the public and consider whether any changes need to be made before the proposal is made “final.” Once made “final,” the rule will be assigned an effective date by which time, assuming no legal challenges, employers will be required to come into compliance.
The timeline for that process is, as always, uncertain, although Spring or Summer 2024 seems like a reasonable estimate of when we might expect to see the “final” rule from the DOL. Further muddying the projected compliance date is that there will almost certainly be legal challenges to whatever rule the DOL ultimately adopts. Those challenging the rule will likely contest the DOL’s ability to impose the salary threshold increase of this magnitude as well as the mechanism for imposing automatic updates. The “major questions” doctrine, which limits the authority of an administrative agency like the DOL to act unless Congress has previously granted the agency clear authority to do so, is also likely to be a factor in any ensuing litigation. After all, that doctrine was recently embraced and invoked by the United States Supreme Court in striking down a rule promulgated by the DOL’s sister agency, the Environmental Protection Agency, in West Virginia v. EPA.
For those employers who want to proactively consider their compliance options, the first step is to identify current exempt employees earning between $35,568 and around $60,000, which will identify the universe of employees potentially impacted by this rule. From there, employers should explore potential solutions for each employee. This could include raising their salary to maintain their exempt status or examining the best way to convert them to non-exempt employees. Reclassification to non-exempt status would entail identifying ways to track their time and pay their earnings in compliance with the FLSA and corresponding Pennsylvania law, such as, for example, by making them hourly employees or paying overtime based on the employee’s existing salary. For local employers considering the latter option, remember that Pennsylvania has unique and employee-friendly requirements for calculating overtime pay for salaried, non-exempt workers.
