On August 30, 2023, a crucial proposed rule was released by the United States Department of Labor (DOL), aiming to substantially increase the minimum salary levels for employees, making them eligible for overtime pay exemptions under the Fair Labor Standards Act (FLSA). If this proposed rule comes into effect, an estimated 3.6 million additional workers in the United States will be granted overtime protection, greatly affecting the “white collar” and highly compensated sectors. Gain a comprehensive understanding of how the DOL’s proposed rule will potentially transform overtime pay eligibility and affect millions of U.S. employees.
Bona fide administrative, executive, and professional salary-based workers are exempt from “white collar” employees under the FLSA. This exemption means the FLSA’s overtime pay requirements do not cover them if they earn a certain minimum salary and perform particular job duties (i.e., the duties test). A white-collar employee who makes $35,568 a year, or $684 a week, is exempt from overtime. Under the proposed rule, the salary level to meet this exemption would increase to $55,068 yearly, or $1,059 a week. The DOL has indicated, however, that it will use the most recent earnings data available when it issues the final rule, which likely will result in an even higher salary threshold for exemption.
Highly Compensated Exemption
To qualify for the FLSA’s highly compensated overtime exemption, employees performing office or non-manual work must, among other things, be paid a minimum annual compensation of at least $107,432, which must include at least $684 a week paid in salary or on a fee basis. The DOL’s proposed rule would raise the total annual compensation requirement for this exemption to $143,988, requiring a weekly payment of $1,059 or more on a salary or fee basis.
The proposed rule provides automatic adjustments to the exemption salary thresholds every three years after the rule’s effective date to reflect new earnings data. Nevertheless, if economic conditions or other unforeseen circumstances warrant, authorities could temporarily delay automatic increases.
United States Territories
The new salary levels under the proposed rule also would apply to employees in the United States territories of Guam, Puerto Rico, the Commonwealth of Northern Mariana Islands, and the U.S. Virgin Islands.
Publication of the proposed rule in the Federal Register on September 8 started a 60-day public comment period for employers and other stakeholders on the rule. After the comment period ends, the DOL will analyze and consider the submitted comments before publishing a final rule updating the earning thresholds. When the final rule will be published is unknown but will likely occur in early 2024.
So, what is next? Employers should consistently monitor the developments of this proposed rule and initiate the identification of exempt salaried employees earning below the expected new minimum salary levels. As the final rule unfolds, necessary adjustments will have to be made. Employers will need to either increase the salaries to the updated thresholds to maintain exempt status or shift them to non-exempt status, ensuring overtime pay compliance. Exploring alternative overtime exemptions without a minimum salary requisite is also a possible route. Given the potential legal complications and the risk of significant liability from incorrect employee classification concerning the Fair Labor Standards Act (FLSA) and overtime protections, seeking expert legal advice is strongly recommended for accurate and compliant classification determinations.