Proposed Rule Change Could Affect Your Exemption for Overtime Pay

On August 30, 2023, the United States Department of Labor (DOL) announced a proposed rule to update the exemptions to the Fair Labor Standards Act (FLSA). The proposed change raises the minimum salary requirements to exempt management employees from receiving overtime pay. No action is required by employers at this time. If the proposed rule is eventually finalized and implemented, the DOL estimates that overtime pay would be extended to an additional 3.6 million salaried employees whose salaries are less than the new, proposed requirements.

This proposed rule change is similar to one suggested by the DOL in 2016, in that it significantly increases the minimum salary requirement and implements an automatic triennial rate hike. The 2016 proposed rule was challenged in court and its implementation enjoined. Eventually, the Trump administration issued rules reducing the increase to the current level and eliminated the automatic rate hike. It is anticipated that this new proposed rule change will also face strong opposition. Consequently, employers should be mindful of the proposed rule change but understand that it may change significantly before it is finalized.

Currently, the FLSA carves out exemptions for its minimum wage and overtime requirements in what are commonly referred to as the “White Collar” exemptions. These exemptions specifically exclude executives, administrative employees, computer employees, certain professional and other employees from receiving overtime pay provided they receive a minimum salary and meet additional criteria.

Employers use the following tests to determine whether an employee is exempt from the FLSA: (1) a salary basis test and (2) a job duties test. The proposed changes by the DOL will affect the salary test specifically. The current minimum annual salary threshold to exempt an otherwise eligible employee from overtime pay is $35,568 for the White Collar exemption, and $107,432 for the highly compensated employee exemption. The DOL is now proposing to increase the salary thresholds to $55,068 and $143,988, respectively. This means that in order to qualify for the exemption, an employer would need to increase the otherwise eligible employee’s pay to the minimum annual salary threshold, or else pay that employee overtime after forty (40) hours in a workweek. Included within the proposed changes is an automatic increase in the minimum salary threshold every three (3) years.

For now, the proposed changes must go through a minimum sixty (60) day comment period before the rule can be finalized. Again, the proposed changes will likely face significant legal challenges.

While there are currently many unknowns, it is important for employers and employees to be aware of the DOL’s proposed changes and adjust their own planning in the event the changes are finalized in the coming year.