On August 30, 2023, the Department of Labor (DOL) released its long-awaited Notice of Proposed Rule Making which would revise the regulations implementing the exemptions from minimum wage and overtime requirements for Executive, Administrative, Professional, Outside Sales, and Computer (EAP) employees under the Fair Labor Standards Act (FLSA).
DOL Proposed Overtime Rule 2023
The proposed rule would significantly raise the salary threshold requirement from $684.00 per week ($35,568.00 annually) to $1,059 per week ($55,068.00 annually). According to the DOL, this shift reflects the 35th percentile of earnings of full-time salaried workers in the lowest-wage census region, which is the American South.
The proposed rule also seeks to increase the highly compensated employee (HCE) total annual compensation requirement for full-time salaried workers from $107,432.00 to $143,988.00 per year based on current data (85th percentile nationally).
If finalized, the new rule would include automatic updates to these earnings thresholds every three (3) years with current wage data. The DOL has clarified that the proposed rule does not suggest changes to the standard duties test. See recently released FAQS here.
What are the Criteria for Overtime Exemptions?
As discussed in our April compliance alert, in order for employees to be exempt from overtime and minimum wage requirements under the FLSA they must meet the following criteria which together comprise the salary basis, salary level, and duties tests:
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1. The employee must be paid a salary (generally meaning a predetermined and fixed amount not subject to variations in the quality or quantity of work performed);
2. The employee must be paid a specific salary amount of at least $684.00 per week under current regulations (this amount would increase to $1,059.00 under the new proposed rule); and
3. The employee must perform primarily executive, administrative or professional duties as defined by the DOL.
DOL Overtime Rule Background
In 2016, the U.S. District Court for the Eastern District of Texas invalidated a similar final rule issued under the Obama administration which raised the salary level from $455.00 per week to $913.00 per week, increased the total annual compensation amount for HCE from $100,000.00 to $134,004.00, and added a mechanism to update the earnings threshold every three years. The district court found that the DOL had exceeded its authority in setting a salary threshold so high that it effectively eliminated the duties test. Without ruling on the permissibility of the mechanism itself, the district court found that as the final rule was unlawful, the automatic updating mechanism was likewise unlawful.
In 2019, the salary threshold was successfully updated under President Trump to the current level of $684.00 per week effective on January 1, 2020. As discussed in our June compliance alert, a lawsuit challenging the DOL’s regulatory authority to establish a salary threshold for the 2019 final rule was filed by a fast-food chain operator named Robert Mayfield in Austin, Texas in 2022. The case remains pending before Judge Robert Pitman in the U.S. District Court for the Western District of Texas.
Wage dynamics have changed significantly since 2019, especially during the COVID-19 pandemic, with employees seeing significant gains in compensation. This underscored the potential inadequacy of the current salary threshold of $35,568.00 in helping to identify bona fide EAP employees. By updating the salary threshold, the DOL is seeking to “more effectively identify who is employed in a bona fide executive, administrative, or professional capacity and ensure that the FLSA’s intended overtime protections are fully implemented.” Increasing the salary threshold will help to achieve the Department’s goal by “reduc[ing] the number of lower-paid white-collar employees who perform significant amounts of nonexempt work” from being included in the exemption.
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However, the DOL also recognized during this rulemaking process that “even a well-calibrated salary level that is not kept up to date becomes obsolete as wages for nonexempt workers increase over time.” The solution to the DOL’s concern for the rule’s potential obsolescence is the adoption of a regulatory provision automatically updating salary levels in order to keep pace with increased employee earnings. The proposed rule would permit pausing of automatic updates under certain conditions, including for the DOL to engage in “notice-and-comment rulemaking to change the earnings requirements and/or updating mechanism, where economic or other conditions merit”.
While the proposed rule does not create any additional recordkeeping requirements for employers beyond those already required under 29 CFR Part 516, the recordkeeping burden for employers under the new rule would likely expand as more employees become eligible for overtime.
The NPRM was published in the Federal Register on September 8, 2023, officially opening the public comment period which will last until November 7, 2023. The proposed effective date for the new rule is 60 (sixty) days following publication of the final rule in the Federal Register. The proposed effective date is significantly more abbreviated than prior proposed overtime rules which featured 90 and 180 day effective dates following publication. The DOL suggests that a sooner effective date is nonetheless appropriate as employers and employees are already familiar with the procedures from the 2019 rulemaking process, and changed economic circumstances warrant the update.
|Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees In this proposal, the Department of Labor (Department) is updating and revising the regulations issued under the Fair Labor Standards Act implementing the exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees…. www.federalregister.gov|
A legal challenge of the rule is highly likely given the number of potential employees affected, as well as the projected increased labor costs to employers.
Employer Considerations and Future Implications
So what does all this mean for employers?
The DOL estimates that in year 1 of the rule becoming effective, 3.4 million currently exempt employees earning more than $684.00 but less than $1,059.00 per week could become eligible for overtime protection in the absence of employers increasing their earnings to or beyond the new salary threshold. Relative to highly compensated employees (HCE), the DOL estimates that 248,900 workers earning at least $107,432.00 per year, and who meet certain minimum duties could potentially become eligible for overtime protection if their total compensation is not increased to the new threshold of $143,988.00 annually.
Much remains to be seen including whether the final rule will remain as proposed once the public comment period has closed, and whether a successful legal challenge of the rule awaits as it did in 2016. Despite this uncertainty, there are steps employers can take now in order to better prepare themselves for the future ahead:
- Employers should take this opportunity to review their employee classifications and conduct an audit of all positions to ensure employees are properly classified as exempt or nonexempt based upon job duties.
- Employers would be wise to also analyze the economic impact of instituting salary increases to maintain the exemption for applicable employees and the potential increased overtime costs associated with potentially reclassifying employees as nonexempt where appropriate.
- Employers facing expanded recordkeeping burdens due to a potential increase in nonexempt employees should also review their current recordkeeping framework and processes to ensure such mechanisms will continue to be effective in meeting their compliance obligations.