On August 30, 2023, the U.S. Department of Labor (“DOL”) announced a notice of proposed rulemaking titled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” that would extend overtime protections to an estimated 3.6 million salaried employees.
The Fair Labor Standards Act (“FLSA”) requires most employers to pay employees overtime compensation at the rate of one and one-half times the regular rate of pay for all hours worked over 40 in a workweek, unless the employee qualifies for an exemption. To qualify as an exempt executive, administrative, or professional employee under the FLSA, generally the employee must satisfy the applicable duties test, be paid on a salary basis regardless of how many hours are worked during the workweek, and the employee’s earnings must meet or exceed a minimum salary threshold also known as the standard salary level.
Under the current regulations, executive, administrative, and professional employees (white collar workers) are considered exempt from overtime pay if the employee satisfies the applicable duties test and is paid at least $684 per week ($35,568 annually). The proposed rule increases the minimum salary threshold to $1,059 per week ($55,068 annually), which is the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently, the South). A footnote to the proposed rule suggests that the salary threshold in the final rule could be as high as $60,209. DOL estimates that 3.6 million salaried worked will become eligible for overtime pay under the new rule, unless their salaries are increased to meet the new threshold.
The proposed rule also increases the total annual compensation threshold for highly compensated employees from the current standard of $107,432 to $143,998, the annualized weekly earnings amount of the 85th percentile of full-time salaried workers nationally. Additionally, the proposed rule seeks to add an automatic updating mechanism to the regulations that would update all minimum salary thresholds every three years based on then current earnings data. Fortunately, the proposed regulations do not alter the existing duties tests for any of the white collar exemptions.
The new proposed minimum salary threshold would apply to employers in all 50 states, D.C., and U.S. territories, except for American Samoa. In 2019, when the DOL last updated the minimum salary threshold, it elected to preserve the salary level set in 2004 ($455 per week) for employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands (CNMI) instead of applying the new standard salary level of $684 per week that applied to employees in the 50 states and the District of Columbia. In the interest of applying the FLSA uniformly, the proposed rule would also apply the standard salary level to employees in all territories that are subject to the federal minimum wage, but the DOL will continue to maintain a special salary level for employees in American Samoa.
Upon publication in the Federal Register, the notice of proposed rulemaking will be open for public comment for 60 days. The DOL will consider all comments received before publishing a final rule. Litigation to challenge the rule, once it becomes final, is also expected. Although the proposed rule does not immediately affect employers, employers should review their classifications of salaried, exempt employees to determine the extent of the impact on their workforce and plan accordingly.
