On September 8, 2023, the Department of Labor (“DOL”) published a Notice of Proposed Rule Making (“NPRM”) proposing a number of changes that would, if enacted, substantially increase the number of workers who would be eligible for overtime pay under the federal Fair Labor Standards Act (“FLSA”). Most critically, the NPRM would raise the annual salary threshold for the FLSA’s administrative, executive and professional exemptions — the so-called “white collar” exemptions — from $684 per week ($35,568/year) to $1,059 per week ($55,068/year).
To be considered exempt from overtime requirements under the FLSA’s administrative, executive and professional exemptions, an employee must: (1) be paid a fixed weekly salary at or above the salary threshold established by the DOL ; (2) be paid on a “salary basis,” such that the employee receives the salary regardless of the quantity and quality of work (subject to certain exceptions); and (3) have “primary duties” that satisfy the FLSA’s “job duties test” for the applicable exemption. Similarly, certain highly compensated employees (“HCEs”) may be exempt if they earn a high-level salary (currently $107,432 annually) and regularly perform at least one of the exempt duties of an executive, administrative or professional employee. The “salary basis” and job duties requirements remain unchanged under the NPRM.
The DOL’s NPRM, if enacted, would include the following significant changes to the salary level threshold:
- Increase the salary threshold from $35,568 to $55,068 per year (a level set at the 35th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region (currently the South));
- Increase the total annual compensation threshold for HCEs from $107,432 to $143,988 per year (a level set at the 85th percentile of full-time salaried workers nationally);
- Increase the salary levels in all U.S. territories besides American Samoa, to the same standard salary level applicable throughout the U.S.;
- Increase the special base rate used for certain exempt employees in the motion picture industry to $1,617/week, or a proportionate daily rate under certain circumstances; and
- Adopt a mechanism that would automatically update the salary-threshold levels every three years, in line with the salary percentiles described above.
The DOL also observes that, while it is proposing a number of changes with this NPRM, key portions of the current regulation are left unchanged. These provisions include the rule allowing an employer to satisfy up to 10 percent of an employee’s salary level with non-discretionary bonuses, incentive payments, and commissions (but not for threshold applicable to highly-compensated employees).
This is not the first time in recent memory that the DOL has modified the salary level threshold. In 2020, the Trump DOL raised the threshold to its current level. In 2016 rulemaking, the Obama DOL had also attempted to raise the salary threshold, but that rule never went into effect after a Texas federal court issued an injunction halting its implementation.
According to the DOL’s estimates, the 2023 proposed changes, if enacted, will affect an estimated 3.4 million additional workers, either by making them eligible for overtime because their salary would be below the new overtime salary thresholds or because they would receive salary increases to preserve their exempt status. An additional estimated 248,900 employees would also be affected, and entitled to overtime, because they would no longer not satisfy the annual compensation threshold necessary to qualify as HCEs.
In addition to the potential impact on several million employees, the proposed changes are likely to affect employers across the 50 states differently. While the rule will change the applicable requirements in most states, it will have no effect in New York and California, where employers are currently required to pay a salary that exceeds the proposed new federal threshold in order to maintain employees’ exempt status.
The DOL will accept comments on this NPRM through November 7, 2023. We will follow and report on future developments on this topic.
For further information, please contact:
Thomas P. Gies, Partner, Crowell & Moring
tgies@crowell.com
