To borrow a phrase from the incomparable Yogi Berra, “[i]t’s like déjà vu all over again.” On Wednesday, August 30, 2023, the United States Department of Labor (“the DOL”) released its newest Proposed Rule that, if implemented, would broaden federal overtime pay regulations to cover millions of additional workers who are currently exempt from overtime eligibility. Entitled Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, the Proposed Rule seeks to dramatically increase the standard salary level and the highly compensated employee total annual compensation threshold, as well as providing a built-in updating mechanism that would allow for automatic updating of all the thresholds.
New 2023 Proposed Rule
Under its new Proposed Rule, the DOL seeks to significantly raise the exempt salary threshold from $684 per week to $1,059 per week. Stated another way, U.S. employees would need to earn $55,068 or more per year to be exempt from overtime pay – a change the agency says would impact 3.6 million workers who are currently exempt from overtime eligibility. Additionally, the new Proposed Rule would make the following changes:
- Automatically update the salary threshold every three (3) years.
- Raise the threshold for the “highly compensated employee” exemption to $143,988 (from the current threshold of $107,432).
- Apply salary thresholds in U.S. territories that are subject to federal minimum wage with some exceptions for American Samoa.
The Proposed Rule seeks to update the regulations that govern which executive, administrative, and professional employees (the so-called “white collar” workers) are entitled to minimum wage and overtime pay protections under the Fair Labor Standards Act (“the FLSA”). The FLSA requires employers to pay its “non-exempt employees” overtime (1.5x the workers’ “regular rate of pay”) for all hours worked in excess of forty (40) per week. See 29 U.S.C. § 207. The DOL’s regulations implementing the FLSA sets forth a variety of employment classifications that are “exempt” from the FLSA’s overtime requirement—including employees performing executive, administrative, and/or professional job duties.
Since the 1940’s, in order for an employee to qualify as an exempt, “white collar” employee, he/she had to meet three “tests”:
- 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 amount of salary paid must meet a minimum specified amount; and
- The employee’s job duties must primarily involve executive, administrative, or professional duties (as defined by the regulations).
Stroll Down Memory Lane
Until rather recently, the DOL’s last update to these regulations came in 2004, when the agency set the minimum salary threshold at $455 per week (or $23,660 per year). Then, in May 2016, the Obama-era DOL kicked off a highly-contentious legal fight when it attempted change to the overtime rule by nearly doubling the minimum salary level from $23,660 to nearly $48,000 per year. At the same time, the 2016 proposal would have also increased the total annual compensation requirement needed to exempt “highly compensated employees” to $134,004 annually (previously set at $100,000), established a mechanism for automatically updating the minimum salary level every three years and allowed employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the new standard salary level.
Ultimately, the May 2016 proposal was challenged in court. On November 22, 2016, the U.S. District Court for the Eastern District of Texas enjoined the DOL from implementing and enforcing the proposal. On August 31, 2017, the court granted summary judgment against the DOL, invalidating the May 2016 proposal. Currently, the Department is enforcing the regulations that have been in place since 2004, including the $455 per week standard salary level.
Ultimately, the Trump-era DOL formally rescind the Obama-era DOL’s 2016 proposal with its own new Proposed Rule, issued on March 7, 2019. The Trump-era Proposal was formally adopted in 2020. With its passage, the DOL officially raised the minimum salary level for exempt employees to $679 per week, or $35,308 annually—the level it currently sits at today. Additionally, the 2020 rule change allowed employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level test (provided such bonuses are paid annually or more frequently); and increased the total annual compensation requirement needed to exempt “highly compensated employees” to $107,432 annually. Additionally, the 2020 rule change did not adopt any changes to the standard duties test for the white collar exemptions.
Make no mistake—the DOL’s goal with the new Proposed Rule is to increase the number of employees eligible for overtime. As with the prior proposals, observers feel the number could rise well above the projected increase. If implemented, the Proposed Rule will undoubtedly result in greater expense or operational change for many employers as they struggle to deal with a shrinking pool of workers who are eligible for an exemption from the overtime pay.
This newest Proposed Rule from the DOL is sure to face its own set of legal hurdles, especially in the face of an election cycle. Experts predict another battle over whether or not the DOL actually possesses the statutory authority to issue a salary-basis or salary-level test. The Proposed Rule is also still subject to a lengthy comment period before any final implementation.
In the meantime, employers are encouraged to be proactive and engage their legal counsel to begin planning for the change now. Preparations should include auditing current practices and projecting the cost of change and FLSA compliance under the anticipated new framework. This includes evaluating the possibility and effects of significantly higher operating costs.
Brunini’s Labor & Employment specialists are monitoring these events and will update you accordingly. In the meantime, feel free to contact any member of Brunini’s Labor & Employment Practice Group if you wish to discuss.