The U.S. Department of Labor (the “DOL”) recently announced a Notice of Proposed Rulemaking, which could make at least 3 million more lower-wage workers overtime-eligible.
The Current Regulations
Under the Fair Labor Standards Act (“FLSA”), employees are overtime exempt if they are employed in a bona fide executive, administrative or professional capacity as defined in the DOL’s regulations (known as the “white-collar exemptions”). Currently, to fall within one of these white-collar exemptions an employee must: (i) be paid a salary that amounts to a minimum of $684 per week; and (ii) primarily perform executive, administrative or professional duties as provided in the DOL’s regulations. The regulations contain a separate exemption for highly compensated employees (the “HCE exemption”), which sets a compensation threshold of $107,432 per year (including at least $684 per week). The DOL last updated these salary thresholds back in 2019 (effective January 1, 2020) from $455 per week to $684 per week (amounting to $35,568 annually) for the white-collar exemptions and from $100,000 to $107,432 for the HCE exemption.
The rulemaking, entitled Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, proposes to again update the salary thresholds for the white-collar exemptions and the HCE exemption as follows:
- Increase the standard salary level using the 35th percentile of weekly earnings of full-time salaried workers in the lowest range Census region (currently the South). The DOL relied on Current Population Survey (“CPS”) Merged Outgoing Rotation Group (“MORG”) data collected by the Bureau of Labor Statistics (“BLS”) for calendar year 2022 to determine a proposed salary level of $1,059 per week (amounting to $55,068 annually). Importantly, however, the weekly threshold number will likely increase when the final rule is published as the DOL will use the most recent data available;
- Increase the highly compensated employee total annual compensation threshold to reflect the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally. Using the BLS’s 2022 CPS MORG data, the DOL identified $143,988 per year (including at least $1,059 per week) as the current proposed threshold. Again, however, this number could increase when the rule is published using more recent data;
- Automatically update the standard salary level and the HCE annual compensation threshold every 3 years, using then-current wage data, with a proposed provision in the regulation “to temporarily delay a scheduled automatic update where unforeseen economic or other conditions warrant”; and
- The DOL is also proposing to increase the salary levels in the U.S. territories that are subject to the federal minimum wage (and which have not been changed since 2004), including the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, the U.S. Virgin Islands, and American Samoa. In all the territories, except American Samoa, the standard salary level would be the same as that in the United States. In American Samoa, the salary level would be set at 84 percent of the weekly threshold (currently calculated as $890 per week).
What This Could Mean for Employers
If finalized as drafted, those earning below the new increased minimum weekly salary level, would no longer qualify for the white-collar exemptions. While challenges – serious ones at that – to the proposed rule are anticipated, employers should evaluate how any final rule may impact their workforce. Responses to the new rule may include:
- Maintaining the exemption by increasing the salary of employees who would fall below the new threshold;
- Reclassifying currently exempt employees and making them eligible for overtime;
- Reducing or eliminating overtime hours for newly classified non-exempt workers to keep overtime costs down;
- Reducing the hourly rate (or salary equivalent) of newly-classified non-exempt workers to account for more overtime hours worked;
- Increasing hiring to spread hours around and limiting overtime hours worked; or
- Some combination of the above.
The answers above will depend on many factors, including for example, the type of job being performed, the employer’s industry, market forces, etc. In making these decisions, employers should also consider how any changes would impact the rest of the workforce. For example, would raising the salaries to maintain the exemption require the employer to raise the salaries of others in similar jobs at a more senior level to retain existing salary differentials?
Employers should also consider how best to communicate the resulting decision(s) to affected employees, especially those who may become overtime eligible. Many overtime exempt employees think of themselves as “professionals,” working long hours in a flexible manner, and who may be entitled to certain benefits (i.e., PTO). They could view any classification change as a change to their identity; a “demotion” in some sense. Suddenly, among other things, they may have less certainty over their annual take home pay, may no longer qualify for PTO at the same accrual rate, and may be limited in their ability to work longer hours (whether at or outside the office). Or consider how an employee whose salary is increased to maintain the exemption would react after they learn that their employer has also reduced their discretionary bonus target to help offset overtime costs. In response, employers will want to effectively communicate the reason for any classification, compensation, and/or schedule changes to limit a potential adverse employee response.
Employers will also need to ensure that newly classified employees are tracking their time, including that they are trained to use those systems, particularly for employees who perform services outside of the office.
If the rule becomes final, it will go into effect just 60 days later (a significantly shorter timeline compared to previous rules). Employers, therefore, should continue to pay close attention to developments on this issue. The Mintz Employment Practice will of course continue to monitor the situation and stands ready to assist.