Department of Labor proposes rule to increase minimum salary levels for overtime exemption under the Fair Labor Standards Act
On August 30, 2023, the Wage and Hour Division of the Department of Labor (DOL) announced a long-anticipated proposed rule increasing the minimum salary levels for overtime exemption under the Fair Labor Standards Act (FLSA).
If the rule becomes final in its current form, the minimum salary level for executive, administrative, professional, outside sales, and computer employees will increase from $684 per week ($35,568 per year) to $1,059 per week ($55,000 per year) – an increase of roughly 55 percent.
The proposed new rule is expected to expand overtime protections to 3.4 million employees nationwide. However, it remains to be seen whether the Notice of Public Rulemaking (NPRM) will be impacted by public comment or litigation challenging the rule, which has hampered similar efforts by past administrations to significantly increase the minimum salary levels for overtime exemption.
Key changes under the proposed rule
Under the FLSA, hours worked by an employee over 40 in a workweek must be paid an overtime rate of 1.5 times their regular rate of pay unless (1) the employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test); (2) the amount of salary paid meets a minimum specified amount (the salary level test); and (3) the employee’s job duties primarily involve executive, administrative, or professional duties, as defined by the DOL’s regulations (the duties test).
While the proposed rule makes no changes to the duties test for any of the white-collar exemptions, the minimum salary level for executive, administrative, professional, outside sales, and computer employees would increase from $684 per week ($35,568 per year) to $1,059 per week ($55,000 per year) to bring minimum salaries in line with the 35th percentile of weekly earnings of full-time salaried workers in the South, the lowest wage census region in the US.
The proposed rule would also increase the minimum annual salary level for employees who are currently exempt under the highly compensated employees (HCE) test from $107,432 ($684 of which must be paid weekly on a salary basis) to $143,988 annually ($1,059 of which must be paid weekly on a salary basis) to bring minimum salaries in line with the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally. While the minimum salary level for HCEs is significantly higher than the salary level for executive, administrative, and professional (EAP) employees, HCEs are subject to a more lenient duties test.
The DOL estimates that the update to the minimum salary level for executive, administrative, professional, outside sales, and computer employees would extend overtime protections to 3.4 million exempt employees whose salaries meet the current minimum but do not meet the proposed minimum unless employers raise their pay accordingly. The DOL also estimates that the proposed rule will impact another 248,900 employees who are currently exempt under the HCE test.
Unless employers raise HCEs’ pay to meet the new minimum salary level, whether these employees would remain exempt would depend on whether they would meet any of the more stringent duties tests for other exemptions.
The proposed rule would also apply the updated minimum salary level for EAP employees to all US territories subject to the federal minimum wage, including employees in Puerto Rico, Guam, the US Virgin Islands, and the Commonwealth of the Northern Mariana Islands (CNMI).
When minimum salary levels were increased in 2019 for the first time since 2004, the minimum salary level for exempt employees in these US territories, which had adopted the federal minimum wage, remained at $455 per week instead of the increased $684 per week for exempt employees in the 50 US states and the District of Columbia.
By way of the proposed rule, the DOL seeks to standardize the minimum salary levels (eg, $1,059 per week for EAP employees) in every US state and territory subject to the federal minimum wage. The DOL noted that it would maintain a special salary level of $890 per week (up from $380 per week) only for employees in American Samoa, which remains subject to unique industry-specific minimum wage rates.
Moreover, the proposed rule would increase the special minimum weekly base rate applicable to EAP employees in the motion picture producing industry from $1,043 per week to $1,617 per week. This special rate was established to relax the salary basis test in consideration of this industry’s “peculiar employment conditions” that often result in employees working less than a full workweek. Unlike EAP employees in most other industries, who must generally earn the full minimum weekly base rate to maintain their exempt status regardless of the number of hours/days worked during the workweek, EAP employees in the motion picture production industry may remain exempt if they are paid only a proportionate amount of the special minimum weekly base rate based on the number of days worked that would yield the special minimum weekly base rate had the employee worked a full workweek.
Lastly, the proposed rule also seeks to amend the DOL regulations to require an automatic update of the minimum salary levels every three years, with an exception for pausing future updates under certain conditions. While acknowledging commitments expressed by the DOL under past administrations to periodically review/update the minimum salary levels, the DOL justified its proposed amendments based on difficulties encountered in collecting necessary, up-to-date data between rulemaking processes to keep pace with changes in employee pay in the absence of regulatory mechanisms. The DOL expressed its hope that the proposed regulations will promote a “timely, predictable, and efficient updating of the earnings thresholds.”
If enacted, the proposed rule would likely have minimal effects on employees in states such as New York and California where the minimum salary thresholds already exceed the federal standards. It also would not cause any change to the federal minimum wage or alter employers’ obligations to comply with applicable state and local wage and hour laws.
Comment period and potential challenges
The DOL invites the public to submit comments on the proposed rule during a 60-day period that will start running when the NPRM publishes in the Federal Register. Following the close of this comment period, the DOL will review the comments and may make changes in a final rule, based on the comments and further analysis of this issue. This process may take several months after the close of the comment period. If a final rule becomes effective, compliance will likely be required as of 180 days after the final rule’s publication.
Once the rule is finalized, however, there is a high risk that it will encounter challenges similar to those faced by the Obama Administration when it finalized a rule in May 2016 that would have nearly doubled the existing salary threshold for overtime exemption, which was $455 per week ($23,660 per year) to $913 per week ($47,476 per year). Like the current proposed rule, the 2016 rule also introduced regulatory mechanisms for updating the minimum salary levels every three years.
While many employers moved to update salaries and reclassify employees in response to the finalized 2016 rule, more than 20 states and business groups secured a nationwide injunction from a federal district court in Texas in November 2016, delaying enforcement/implementation of the rule weeks before it was due to go into effect in December 2016.
On August 31, 2017, the federal district court in Texas invalidated the Obama Administration’s final rule after granting summary judgment to the plaintiffs and finding that the DOL exceeded its authority. While the DOL appealed the decision to the 5th Circuit, the DOL under the Trump Administration subsequently finalized a rule in 2019 with a more modest increase to the minimum salary level from $455 per week to $684 per week that officially replaced/rescinded the 2016 rule.
Accordingly, the pending appeal was rendered moot, the 2016 rule never went into effect, and many employers who had already increased salaries/reclassified employees in anticipation of the 2016 rule were left in a bind. Unlike the 2016 rule or the current proposed rule, the 2019 rule did not include regulatory mechanisms for periodically updating the minimum salary thresholds.
While no action to comply with this proposed rule is required at this time, employers should track the status of this proposed rule closely and take it into consideration when forecasting budgets.
If the rule is finalized, employers should consider whether and how to (1) raise the salaries of any currently exempt employees whose salaries would not meet the updated minimum salary level (ie, $1,059 per week) to maintain their exempt status; (2) reclassify currently exempt employees whose salaries would not meet the updated minimum salary level, which would likely require training regarding time recording and what constitutes compensable “work” time; and (3) coordinate with internal/third-party payroll providers to make regular rate calculations and issue wage statements for a number of additional employees and the pay types associated with their positions.
For example, many currently exempt employees earn non-discretionary bonuses separate from their base pay that would need to be factored into the regular rate for calculating overtime if they are reclassified.
Nevertheless, due to the high risk of opposition by business groups, among others, and legal challenges in court, employers are strongly encouraged to remain strategic about increasing salaries or reclassifying employees in response to the proposed rule even after it is finalized.
We will continue to monitor this proposed rule and report on new developments.