Under the Fair Labor Standards Act (FLSA), employers must provide overtime pay to employees at one and one-half times an employee’s regular pay rate for every hour the employee works beyond 40 hours in a workweek, unless the employee falls within a specified exemption. Under current U.S. Department of Labor (DOL) regulations, exempt employees include executive, administrative, professional, and computer employees who perform certain duties, and earn at least $684 per week ($35,568 annually). Highly compensated employees who perform office or nonmanual work and are paid a total annual compensation of $107,432 are also exempt.
In September 2023, the DOL Wage and Hour Division published a notice of proposed rulemaking that would increase the standard salary level and the highly compensated employee total annual compensation threshold for an employee to be exempt from the overtime requirements of the FLSA. This proposed overtime rule — Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees — would (1) increase the standard salary level requirement for executive, administrative, professional, and computer employees from $684 to $1,059 per week ($55,068 annually); (2) increase the annual salary threshold requirement for highly compensated employees from $107,432 to $143,988; and (3) automatically raise these salary thresholds every three years based on current earnings data.
The DOL intends to make this proposed rule final in April 2024. If implemented, this rule will require employers to review currently exempt employees’ pay data to determine if they will continue to be exempt from overtime requirements moving forward. It will also require employers to either change employees from exempt to nonexempt status or increase the wages earned by certain employees to maintain exempt status.
This proposed rule, however, is hotly debated and will likely face legal battles in court before it can be implemented. In fact, the DOL issued a similar rule in 2016 that was ultimately invalidated by a federal court. The 2016 rule sought to increase the standard salary level requirement for exempt employees from $455 to $913 per week and increase the salary threshold requirement for highly compensated employees from $100,000 to $134,004 annually. The 2016 rule also included a provision automatically raising these salary thresholds every three years. But a federal district court in Texas enjoined and then invalidated this 2016 rule, finding the DOL exceeded its authority. Specifically, the court found that the language of the 2016 rule and the substantial increase in the salary thresholds effectively eliminated the other requirements of the FLSA, which the DOL was not authorized to do. The court also found that the provision requiring an automatic increase in the salary thresholds was unlawful for similar reasons.
While the court’s invalidation of the 2016 rule will likely be relevant to whether courts will find the recently proposed rule lawful, another case may also come into play. In 2019, the DOL implemented a rule, effective on January 1, 2020, increasing the salary thresholds for exempt employees from $455 to $684 per week and the highly compensated employee salary threshold from $100,000 to $107,432 annually. Unlike the invalidated 2016 rule and the recently proposed rule, the 2019 rule did not include an automatic increase provision. In 2023, a different federal district court in Texas found that the 2019 rule did not exceed the DOL’s authority, in part, because unlike the 2016 rule, the 2019 rule did not effectively eliminate the other requirements of the FLSA. That case is currently pending appeal to the Fifth Circuit.
Furthermore, in February 2024, Representative Eric Burlison introduced a new bill—the Overtime Pay Flexibility Act (H.R.7367)—that seeks to prohibit the Secretary of Labor from finalizing, implementing, or enforcing the recently proposed overtime rule that the DOL seeks to finalize in April 2024.
Employer action needed?
Given that the recently proposed rule is slated to face contentious legal battles, employers do not need to take immediate action. Instead, employers should be aware of the rule and its potential impact on employee classification, be prepared to determine which employees’ exempt status could change moving forward, and continue to monitor the rule’s progress.
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