On August 30, 2023, the Department of Labor (DOL) announced that it will be proposing new regulations that would increase the number of employees who are considered non-exempt and therefore entitled to overtime compensation.

Proposed Increase to Minimum Required Salary to Be Exempt from Overtime Pay Requirements

Under current regulations implementing the Fair Labor Standard Act (“FLSA”), an employee is exempt from the FLSA’s minimum wage and overtime pay requirements if the employee is “employed in a bona fide executive, administrative, or professional capacity.” In order to meet this exemption, the employee must meet a three-part test:

• the employee must be 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);
• the employee’s salary must meet a minimum specified amount (the salary level test); and
• the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test).

Under the second part of this test, the “salary level test,” current regulations require an employee to be paid $684 per week ($35,568 per year) to meet the bona fide executive, administrative, or professional capacity exemption from overtime pay rules.

The DOL is proposing to increase the pay necessary to meet the “salary level test” to $1,059 per week or $55,068 annually for a full-year worker, meaning that an employee must be paid at least that amount ($1,059 per week/$55,068 annually) to be potentially eligible for the bona fide executive, administrative, or professional capacity exemption from overtime pay rules.

Proposed Increase to Minimum Required Salary to Be Considered a Highly Compensated Executive and Exempt from Overtime Pay Requirements

In addition to this change, the DOL is also proposing a change to the definition of who qualifies as a “highly compensated employee” or “HCE.”  Under 29 C.F.R. 541.601, HCEs are exempt from minimum wage and overtime requirements. To be considered an HCE, an employee must:

• receive total annual compensation of at least $107,432; and
• regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee.

The HCE exemption applies only to employees whose primary duty includes performing office or non-manual work. Accordingly, an employee may qualify as an HCE if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements for the executive exemption from overtime pay.

The DOL is proposing to increase the total annual compensation requirement for HCEs to $143,988, of which at least $1,059 per week must be paid on a salary or fee basis. This will also increase the number of employees who are eligible for overtime pay.

Updates to Salary Levels Every Three Years

Finally, the DOL is also proposing to implement automatic updates to both salary levels every three years. The DOL is proposing to automatically update the standard salary level by adjusting it to remain at the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region. The HCE test’s total annual compensation requirement would be reset triennially at the annualized weekly earnings of the 85th percentile of full-time non-hourly workers nationally.

The DOL estimates that 3.6 million workers will be impacted by these changes in the first year of implementation. This includes 3.4 million workers who meet the standard duties test and earn at least $684 per week but less than $1,059 per week and would either become eligible for overtime or have their salary increased to at least $1,059 per week. The DOL also estimates that 248,900 workers would be affected by the proposed increase in the HCE compensation test from $107,432 per year to $143,988 per year.

Comment Deadline and Potential Effective Date

The DOL has not yet published its Notice of Proposed Rule Making in the Federal Register. When it does, comments can be submitted online at www.regulations.gov, using Regulatory Information Number (RIN) 1235-AA39. Comments can also be submitted in writing to the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W., Washington, DC 20210, with a reference to Regulatory Information Number (RIN) 1235-AA39 in the written comment.

The effective date of the proposed changes, if implemented, would be sixty days after the final rule is published in the Federal Register.

Additional Information

The DOL has published FAQ regarding its proposed rule at:

https://www.dol.gov/agencies/whd/overtime/rulemaking/faqs

In that FAQ, the DOL stated that it is revising the salary levels because:

The Department is committed to keeping the earnings thresholds up to date for the benefit of both workers and employers. Four years have passed since the 2019 rule, during which time salaried workers in the U.S. economy have experienced rapid growth in their nominal wages, which lessens the effectiveness of the current salary level threshold. Through this rulemaking, the Department seeks to update the salary level test to more effectively identify who is employed in a bona fide executive, administrative, or professional capacity and ensure that the FLSA’s intended overtime protections are fully implemented.

In addition to updating the salary level to account for increased wages, the Department’s proposal would ensure that the salary level effectively performs its historic function of screening nonexempt employees from the overtime exemption and would more effectively account for the switch from a two-test to a one-test system.

The DOL is not proposing other changes to the standard duties test.