The U.S. Department of Labor (“DOL”) recently announced a proposal to revise the Fair Labor Standards Act (“FLSA”) regulations to, among other things, make an additional 3.6 million employees eligible to receive overtime by significantly increasing the exempt employee salary threshold. Employers can get a head start on determining the impact the proposed increase would have on exempt employee classification—and their short-term bottom line—by assessing which employees currently classified as exempt would be impacted by the proposed increase and identifying how best to address that. In addition, employers can use this opportunity to assess the propriety of their exempt employee classifications overall and make corrections as may be needed under existing—and proposed future—law.

The Current Law: Unless they fall within an FLSA exemption, workers covered by the FLSA are entitled to receive overtime pay for hours worked in excess of 40 in a given workweek (subject to more stringent state and local law requirements regarding exemptions and overtime compensation). Common federal exemptions include the executive, administrative and professional (“EAP”) exemptions, referred to collectively as the “white collar exemptions.” Employees currently qualify for an EAP exemption if they (i) are paid on a salary basis, earning a minimum weekly salary of $684 ($35,568 per year), and (ii) primarily perform duties defined by law as exempt (e.g., managerial duties, exercising discretion and independent judgment with respect to matters of significance, etc.). Current regulations also provide that highly compensated employees (“HCEs”) are exempt from the overtime rules if they (i) earn at least $107,432 per year, and (ii) regularly perform one or more of the job responsibilities identified in an EAP exemption. (Notably, the HCE exemption is not recognized in all jurisdictions.)

Basis for the Proposed Modifications: In early 2014, President Obama ordered the DOL to “update” and “streamline” the overtime regulations to make them simpler and more reflective of the modern economy. The DOL issued proposed regulations and ultimately, a final rule that, among other things, more than doubled the exempt employee salary threshold, which had stalled at $23,600 for over a decade. The new rule took effect in December 2016 but was invalidated soon thereafter by a federal court in Texas. The DOL later amended (and significantly curtailed) the rule under the Trump administration, including implementation of more modest increases to the EAP and HCE salary thresholds, which became effective in January 2020.

On Aug. 30, 2023, the Biden administration’s DOL announced that it would attempt to promulgate rules similar to those introduced by the Obama administration in order to offer “low-paid salaried workers” rights to overtime pay by “better identifying which employees are executive, administrative or professional employees who should be overtime exempt.”

Key Proposed Changes:

• Salary Threshold Increase: The minimum salary threshold for the white collar exemptions would increase significantly, from $684 per week ($35,568 per year) to $1,059 per week ($55,068 per year).
• Highly Compensated Employees: The salary threshold for the HCE exemption would increase from $107,432 to $143,988 per year.
• Automatic Updates: The proposed regulation would automatically update the EAP salary threshold, as well as the HCE salary threshold, every three years to reflect current earnings data, which could be an upward or downward adjustment based on data published by the U.S. Bureau of Labor Statistics.

What Isn’t Changing: The salary threshold is just the first hurdle in classifying employees as exempt; workers also must satisfy the applicable “duties” test (i.e., confirming that an employee’s primary duties are exempt ones). The proposed rule does not modify the duties tests. Additionally, the proposed rule would not change the way that bonuses and incentive pay may be counted toward meeting the salary threshold; nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis could still be used to satisfy up to 10% of the salary levels.

Looking Forward: Between now and Nov. 7, 2023, interested parties can submit comments on the proposed rule to the DOL and their comments will be considered in the final rulemaking. History suggests that the proposed rule will undergo changes based on public comment before the DOL publishes its final rule, and as the DOL has acknowledged, legal challenges to the final rule are likely.

What Employers Should Do Now: Savvy employers will use this interim period to audit their exempt employee workforce, preferably under legal counsel’s oversight. The purpose is twofold.

• First, employers should identify workers whose classification would be impacted based on the proposed salary threshold increase, a straightforward assessment. Once identified, strategize on the best way to handle those employees (i.e., by reclassifying them as hourly versus increasing their salaries), taking into account budgetary and other business considerations. For example, how many hours per week does the employee normally work? What will that mean to the bottom line if the employee is reclassified as non-exempt and overtime-eligible? Assuming the employee meets the “duties” test for the applicable exemption, would it make more sense to increase the employee’s compensation to meet the new salary threshold? Or make the employee non-exempt and adjust staffing to minimize overtime costs? Employers will need to factor in the automatic adjustments as well, which would add a level of uncertainty in long-term planning.
• Second, employers can use this unique opportunity to more broadly assess employee exemption status to determine whether workers meet both the salary threshold and the duties tests. The proposed rule provides companies with a justification for making appropriate adjustments—even in advance of the final rule being issued—without raising some of the red flags and morale issues that might normally be triggered by employee reclassification.

On a related note, employers should bear in mind that transitioning workers from exempt to non-exempt status comes with additional timekeeping burdens, and training will be important to ensure, for instance, that employees properly track their time and take meal and rest breaks as appropriate.

Conclusion: Analyzing these issues now enables companies to get a head start on compliance with the potential new regulations. It permits employers to proactively “right-size” compensation and adjust classification status for employees who are currently near or below the anticipated new salary threshold, as well as other workers. And it allows an opportunity to plan any necessary transitions from the standpoint of budgetary impact, other effects on the business and messaging to employees. Working with legal counsel well versed in these issues is critical to ensure compliance with federal, as well as state and local, requirements as they are being continuously modified, in addition to ensuring the confidentiality of internal audits to the extent possible.