Department of Labor Proposes Exempt-Status Overhaul

On August 30, 2023, the U.S. Department of Labor (DOL) proposed significant increases in the compensation thresholds that must be met for employees to be classified as exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA). If the proposal is finalized as presented, DOL estimates that 3.6 million employees currently classified as exempt will be impacted, requiring employers to either raise their salaries or begin paying them overtime and tracking the time that they work.

Current law

Under the current legal standard, an employee must meet three requirements to be classified as exempt from overtime under the FLSA executive, administrative, or professional exemptions – the so-called “white collar” exemptions:

  • Satisfy a “duties test” (i.e., have and perform certain white-collar job duties);
  • Be paid on a salary or fee basis (as opposed to an hourly basis); and
  • Be paid at least $684 per week, which is roughly $35,568 a year.

There are some exceptions to the above requirements. For example, employees earning at least $107,432 a year may also be exempt under the “highly-compensated employee” exemption if they satisfy a relaxed version of the “duties” test. Likewise, certain types of employees need not meet the above salary tests to be exempt, such as doctors, lawyers, and teachers.

DOL’s proposed rule

DOL’s August 30 Notice of Proposed Rulemaking proposes to substantially increase the dollar thresholds applicable to these exemptions. Specifically, the proposed rule would make two changes:

  • Increase the threshold for the white-collar exemptions to $1,059 per week, or $55,068 a year; and
  • Increase the threshold for the highly-compensated employee exemption to $143,998 a year.

Notably, DOL acknowledges that the white-collar threshold will likely be higher when a final rule is promulgated, because the dollar amount will be pegged to then-current wage information from the Bureau of Labor Statistics. DOL predicts that if the rule is finalized by the end of this year, the white-collar threshold could be as high as $59,285 a year, and, if the rule is finalized in early 2024, $60,209.

The proposed rule also provides for automatic updating of the compensation thresholds every three years based on then-current wage data and adjusts compensation thresholds for exempt status currently applicable in the U.S. territories and to the motion picture industry.

What happens next?

Because the proposed rule must undergo notice-and-comment review, it is unclear how soon DOL might issue a final rule. However, we anticipate that a final rule is at least several months away. The proposed rule is expected to elicit significant commentary and could be modified when a final rule is published. Notably, the Obama administration’s proposed rule to substantially increase the compensation thresholds was not finalized until approximately 10 months after it was proposed. The rule may also invite legal challenges. Indeed, the Obama administration’s final rule was blocked by a Texas federal court back in 2017.

Next steps for employers

DOL states that, once the proposed rule is finalized, employers will have only 60 days to come into compliance. This is less time than DOL has previously given employers to respond to changes to the overtime rules, including the blocked Obama rule. Although the exact compensation thresholds are not known at this time, employers can prepare for a final rule now by taking the following steps:

  • Identify all employees currently classified as exempt under the white-collar or highly-compensated employee exemptions who may not be exempt under the proposed new thresholds.
  • Estimate the additional payroll costs your organization will incur if the impacted employees are reclassified as nonexempt.
  • Determine the potential actions to take with respect to each affected employee if the rule is finalized. Options include reclassifying the employee as nonexempt; increasing the employee’s salary to the new compensation threshold in order to maintain exempt status; determining whether another exemption applies (such as the exemption for hourly computer professionals); and/or restructuring or reassigning work in order to reduce the need for overtime.
  • Plan for reductions in compensation and/or fringe benefits, or potential layoffs, which may be necessary as a result of increased payroll costs imposed by the new rule.
  • Identify organizational changes that will be required when employees are reclassified as nonexempt, such as stricter regulation of after-hours or remote work (which can create unexpected overtime obligations if nonexempt employees work after hours without authorization), and train newly nonexempt employees on accurate timekeeping.
  • Consider whether to conduct a comprehensive wage-and-hour audit to identify and correct current FLSA misclassification issues.
  • Consider whether to provide comments to the Department of Labor as part of the notice-and-comment process.

Employers should also consider their state wage-and-hour law obligations, which may be more stringent than the FLSA requirements (for example, the compensation threshold for overtime exemption in California is currently $64,480).

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