On September 8, 2023, the federal Department of Labor (“DOL”) published a Notice of Proposed Rulemaking (“NPRM”) to revise the Fair Labor Standards Act (“FLSA”) regulations governing overtime exemptions for executive, administrative and professional employees, commonly referred to as the FLSA’s “white collar exemptions.” As the NPRM provides, the DOL proposes to more than double the weekly minimum salary level to qualify for these white-collar exemptions from its current level of $684 per week to $1059 per week ($55,068 annually). The DOL also proposes an increase in the annualized salary required to satisfy the highly compensated employee (“HCE”) exemption from $107,432 to $143,988 and an automatic updating mechanism to update salary thresholds every three years.
Background
According to the federal FLSA, all non-exempt employees must receive at least minimum wage for every hour worked and overtime pay for time worked in excess of 40 hours in a seven-day workweek. The FLSA permits some workers to be classified as “exempt” from the overtime requirement, including the white-collar exemptions for executive, administrative, and professional employees. To qualify for one of the white-collar exemptions, the white-collar employee must be (1) paid on a salary basis, meaning that they are paid a predetermined and fixed salary that is not subject to variations in the quality or quantity of work performed (the “salary basis test”); (2) earn a minimum weekly salary, currently set at $684 (the “salary level test”) and, (3) primarily perform the applicable “white collar” job duties as defined by DOL’s regulations (the ”duties test”).
Proposed Changes and Public Comment Process
As noted above, on September 8, 2023, the federal DOL published the NPRM and invited the public to comment for sixty days as part of the standard rulemaking procedure. The DOL proposes the following amendments to the current rule for public comment:
- Increase the current minimum salary threshold to $1059 per week ($55,068 annually);
- Increase the current highly compensated employee salary from $107,432 annually to $143,988 annually; and
- Implement an automatic updating mechanism related to earning thresholds.
The NPRM does not propose any changes to the white-collar “salary basis” or “duties” tests.
This particular public comment period closes on November 7, 2023. Once the DOL processes the public comments, it may choose to revise the rule, abandon the proposed rule, or move forward to the final rulemaking process.
A Little History
Many business owners, CFOs, and HR professionals may remember what happened in 2016 when the previous minimum salary threshold of $455 per week ($23,600 annually) was scheduled to increase to $913 per week ($47,892 annually). Organizations jumped into action and began preparing for it, including preemptively increasing many employee salaries to the new minimum salary threshold.
However, just days before the final rule took effect, a federal judge issued a nationwide preliminary injunction in response to a pending lawsuit against the DOL. The DOL ultimately withdrew the final rule and implemented a compromised increase in the weekly salary minimum from $455 to $684. This increase took effect on January 1, 2020, and remains the current weekly minimum amount required to satisfy the “salary level” test.
Recommendations for Employers
Given the history and significant changes proposed, employers are encouraged to react in a more measured fashion this time. The risk of repeat litigation blocking this 2023 proposed rule is present, and organizations should consider all of their options before increasing wages to the proposed minimum threshold of $1059 per week. For now, we recommend that organizations continue to monitor the situation and consider participating in the public comment process to share their perspectives.
While the salary threshold criterion is up in the air, now is nonetheless a good time for employers to review the more troublesome part of the white-collar exemption: the standard duties test. Because it is not a simple assessment (and you cannot rely on a job title), the test can be challenging to determine whether an employee qualifies for an overtime exemption. For example, if you have an office manager with no direct reports and you plan to use the Exemption for Administrative Employees, the employee’s primary duty must:
- Be the performance of office or non-manual work directly related to the management or general business operations of your organization or of your customer (such as tax expert or financial consultant); and
- Include the exercise of discretion and independent judgment with respect to matters of significance.
Misclassification can result in liability for overtime back pay, liquidated damages, penalties, litigation expenses, compliance monitoring, corrective action, and reputational damage. In summary, protect your organization by understanding the FLSA’s requirements, stay in tune with federal, state, and local laws and agency rule changes, and consult your employment attorney for assistance.