On August 30, the Department of Labor proposed a new rule that would make 3.6 million more U.S. workers eligible to receive overtime pay. The proposed rule would require employers to pay overtime to salaried employees whose primary duties are executive, administrative, or professional but who make less than $1,059 per week, or $55,068 per year.

Proposed Changes to the Current Overtime Exemption Salary Requirements

Under the Fair Labor Standards Act, most hourly workers are entitled to receive overtime compensation after they have worked 40 hours in a week at no less than time-and-a-half of their regular rate of pay; however, salaried employees primarily performing executive, administrative, or professional duties are exempt from receiving overtime pay unless their income is less than a certain amount. Currently, the salary cutoff for overtime eligibility is $35,568, and the proposed increase would constitute a fifty-five percent increase. Notably, the proposed rule would also require automatic updates to the salary level for overtime eligibility every three years based on wage data.

Additionally, the proposed rule would also make more employees eligible to receive overtime by raising the Highly Compensated Employee (HCE) exemption annual compensation level. Currently, some highly compensated employees are exempt from overtime benefits even if their employment responsibilities do not meet the criteria for administrative, professional, or executive duties. For example, if an employee meets some criteria for a standard exemption, such as someone who routinely directs multiple other workers, and the employee makes more than $107,432 per year, they are likely exempt from receiving overtime, even though they do not meet all the requirements necessary to be classified an executive employee under the standard test. The Department’s proposed rule would increase the salary threshold for HCE employees from $107,432 to $143,988 per year, a thirty-four percent increase.

If enacted, the new rule would likely heavily affect hospitality, manufacturing, and retail industries. The Department also estimates that in its first year the new rule would impose $1.2 billion of direct costs on employers.

What Happens Next?

The proposed rule is only a proposal at this time. It has not been officially enacted and is subject to a public comment period. Many employers may recall a similar significant proposed escalation under the Obama administration in 2016. That proposed rule would have more than doubled the overtime exemption threshold, raising it from $23,660 to $47,476. After significant preparation in anticipation of the proposed change, the rule was blocked by a permanent injunction and the Department of Labor eventually formally rescinded it. That could happen again here, but it is far from certain. Recent inflation and nationwide increased costs of living may mitigate the reaction and concern that halted the Obama administration’s proposed increase.  The exemption salary threshold was eventually raised to $35,568 in 2019 under the Trump administration, a more modest increase than the Obama-era proposal.

To be certain, if the rule does become effective, it will mark a sea change with a significant impact on many businesses. The Department of Labor has invited public input, stating that it “encourage[s] continued stakeholder input during the public comment period.” Notably, the Department is required to review and address all substantive public comments, and it will likely face legal challenges if the proposed rule is enacted. The proposed rule is currently pending publication in the Federal Register. After publication, employers and other interested parties will have 60 days to submit written feedback. In 2019, the Department received over 300,000 comments after unveiling its proposed overtime salary threshold increase.

In these times of uncertainty, you can count on the labor and employment team at WRVB to monitor legal developments and keep you up to date on this and other changes that affect employers.