The US Department of Labor seeks to increase the salary levels needed to qualify as exempt under the Fair Labor Standards Act’s white-collar and highly compensated exemptions.
On August 30, 2023, the US Department of Labor (DOL) announced proposed revisions to the overtime exemptions under the Fair Labor Standards Act (FLSA). The proposed rulemaking comes on the heels of similar rulemaking efforts in 2016 and 2019 and would significantly increase the minimum salary needed to qualify for the main white-collar exemptions from $35,568 annually ($684 per week) to $55,068 annually ($1,059 per week).
The DOL also proposes dramatically increasing the minimum total annual compensation required to qualify for the highly compensated exemption, from $107,432 annually to $143,988 (of which at least $1,059 per week must be paid on a salary or fee basis). Additionally, the proposed rule includes a mechanism to automatically update the earnings thresholds every three years. The proposed rule does not include changes to the FLSA’s duties tests.
The DOL is providing the public with a 60-day comment period after the proposed rule is published in the Federal Register. The DOL estimates that approximately 3.4 million workers who are now classified as exempt under current regulations will become overtime eligible under the proposed regulations without some intervening action by employers (i.e., raising their salaries).
BACKGROUND
The FLSA’s white-collar exemptions exclude certain executive, administrative, and professional employees from federal minimum wage and overtime requirements. Currently, to qualify for one of these exemptions, an employee generally must
- be paid on a salary basis, meaning that he or she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test);
- be paid more than a specified salary threshold, currently $684 per week or $35,568 annually (the salary level test); and
- primarily perform executive, administrative, or professional duties as provided in the DOL’s regulations (the duties test).
Additionally, under the “highly compensated test,” certain employees are exempt from the FLSA’s overtime pay requirements if they are (1) paid total annual compensation of at least $107,432, (2) receive at least $684 per week paid on a salary or fee basis, (3) perform office or nonmanual work, and (4) customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.
The DOL last updated the white-collar exemption regulations in 2019. That update, which set the standard salary level test at its current thresholds, has been in effect since January 1, 2020.
THE PROPOSED RULE
Key changes in the proposed rules include the following:
- Increasing the annual minimum salary needed to qualify for the white-collar exemptions to $55,068 ($1,059 per week).[1]
- Increasing the minimum annual compensation needed to qualify for the highly compensated exemption to $143,988.
Additionally, the proposed rule provides for automatic adjustments to the salary thresholds. Under this mechanism, the salary levels—for both the white-collar and highly compensated exemptions—will automatically adjust every three years to reflect current earnings data:
- White-Collar Exemptions: Salary level to be adjusted to remain at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region.
- Highly Compensated Exemption: Compensation level to be adjusted to remain at the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally.
The DOL proposes that both adjustments be made using the most recent available four quarters of data, as published by the US Bureau of Labor Statistics. While the proposed rule calls for the implementation of this automatic updating mechanism, it also allows the DOL to temporarily delay a scheduled update when unforeseen economic or other conditions warrant a delay.
Finally, the proposed rule reinstates the pre-2019 policy of applying the standard salary threshold ($1,059 per week) for employees based in US territories that follow the federal minimum wage, including Puerto Rico, Guam, US Virgin Islands, and Northern Mariana Islands.
The proposed rule does not revise the duties tests for any of the white-collar exemptions.
DOL REQUEST FOR COMMENT AND RELATED DEADLINES
The proposed rule was posted on the DOL’s website on August 30, but it has not yet been published in the Federal Register, which will trigger the start of the 60-day comment period. We expect it to be published in the next few days. Comments will therefore likely be due in early November, unless an extension of the comment period is granted.
While the DOL seeks comments on all aspects of the proposed rule, we anticipate that commentors will focus on topics such as the DOL’s authority to set a salary level; whether salary levels should be adjusted for different regions; and whether the proposed salary levels and current duties test effectively screen out employees who are not bona fide exempt employees. We likewise anticipate a significant number of comments on the automatic adjustment mechanism.
As with prior rulemaking efforts on this topic, we expect that various stakeholders may pursue litigation challenging the proposed rule.
KEY TAKEAWAYS
The proposed revisions to the FLSA’s white-collar exemptions are designed to extend overtime protections to millions of employees, particularly those in the manufacturing, financial, professional services, and healthcare industries. Regardless, employers in all industries should consider the following actions:
First, employers and trade associations affected by the proposal should consider submitting comments to ensure that the regulatory record reflects the true impact of any proposed changes and to shape the final rule.
Second, the increase in the compensation required to meet the proposed salary level test will likely have a material economic impact on many employers. Moreover, publicity surrounding the proposed changes may cause employees to question their current classification and compensation.
As a result, employers should consider auditing their current employee population to determine the impact on staffing and compensation models, and to review the classification of “close to the line” positions. Changes in response to the new salary level could include raising salaries for certain employees to meet the new proposed standards, bolstering job duties, or reclassifying employees from exempt to non-exempt.
Any such decisions require consideration of a broad range of issues, including a communication strategy, manager, and employee training, new or revised timekeeping policies and practices, scheduling, compensation structures, calculation of applicable overtime rates, and many other issues. Planning ahead is therefore critical to managing the risks associated with these potential changes.
Finally, regardless of the fate and timing of the final rule, employers must remain mindful of states with overtime laws that already require higher salary levels to qualify for certain exemptions. Some states increase these exemptions every year, and employers must simultaneously comply with these state exemptions and with whatever federal minimum is implemented.
[1] The DOL is not proposing any changes to how nondiscretionary bonuses and incentive pay (including commissions) are counted toward the salary level requirement. If the proposed rule is finalized in its current form, employers can still satisfy up to 10% of the salary level through the payment of nondiscretionary bonuses and incentive pay (including commissions).
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