DOL Proposes New Overtime Rule To Increase the Required Salary Level for Exempt Employees

By Fiona Ong - Shawe Rosental LLP

August 30, 2023

The U.S. Department of Labor has now issued its highly-anticipated proposed revision to the regulations governing which employees are exempt from the requirement to pay overtime for all hours worked over 40 in a workweek. As expected, the proposed rule seeks to increase the salary levels for the statutory “white-collar” exemptions from overtime, meaning that up to 3.4 million more employees (according to the DOL) will be eligible for overtime pay.

The Current Rule: The current overtime rule, which was most recently revised in 2019, sets forth three tests, all of which must be met in order for a white-collar employee to be deemed exempt: (1) the employee must be paid on a salary basis; (2) the employee’s salary must be at least $684 per week (equaling $35,568 per year); and (3) a duties test specific to the exemption in question – executive, administrative or professional (EAP).  There is also a highly-compensated employee (HCE) exemption, under which an employee must make at least $107,432 per year (in addition to being paid at least the standard salary level per week on a salary or fee basis) and perform at least one exempt duty.

The Backstory: In 2004, the salary level was set at $455 per week (equaling $23,660 per year). As employers may recall, the Obama DOL announced a revision to the overtime rule in 2016 that would have vastly increased the salary levels for the EAP and HCE exemptions – to $47,476 per year ($913 per week) and $134,004, respectively. The rule also contained an automatic increase in the salary levels every three years. There was immediate outcry from the business community, and litigation ensued. Only days before the rule was to take effect, it was enjoined by a federal court in Texas, which found that the new salary level exceeded the DOL’s authority.

Under the Trump administration, the DOL then issued new regulations in 2019 with a more modest increase to the current EAP and HCE salary levels. It did not commit the DOL to any timetable for increasing the salary level in the future, although the DOL stated that it intended to update these levels, which had not been updated since 2004, “more regularly in the future through notice-and-comment rulemaking.” Which brings us to this moment.

The Proposed Rule: According to the DOL, the current proposed rule seeks to update the salary level in order “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.” The changes proposed are as follows:

•  Increase in the EAP salary level. The DOL proposes to set the EAP salary level at $1,059 per week ($55,068 per year). In setting this number, the DOL has revised the methodology that was used to set the salary level in 2004 – increasing from the 20th to the 35th percentile of earnings for full-time salaried workers in the lowest income U.S. Census region (currently the South) and in the retail sector. Interestingly, when the Obama DOL unsuccessfully sought to increase the salary level in 2016, it used the 40th percentile as its hallmark – a move that was subject to legal challenge. But in 2019, the DOL returned to the same 20th percentile methodology as used in 2004 – which was never challenged – admittedly and successfully to avoid further litigation over its attempts to increase the salary level.
•  Increase in the HCE salary level. In addition, the DOL proposes to set the required annual salary for the HCE exemption at $143,988. Under the 2004/2019 rules, this number was based on the 90th percentile of full-time salaried workers nation-wide (rather than the regional data used for the EAP exemptions). This time, however, it is based on the annualized weekly earnings of the 85th percentile of those workers.
•  Automatic increase every three years. Of particular note, the DOL is proposing to automatically update salary levels every three years based on then-current wage data. The DOL would be allowed to temporarily delay a scheduled update as warranted by unforeseen economic or other conditions. Notably, when the DOL made this same proposal in 2016, it was subject to legal challenge.
•  No change to the duties test. There was some uncertainty over whether the DOL would seek to revise the duties test, given that it had flirted with the idea in past proposed rules. However, it decided not to propose any changes to the duties test “at this time,” explaining that “[a]s long as it is paired with an appropriate salary level requirement, the standard duties test can appropriately distinguish bona fide EAP employees from nonexempt workers.”

Interestingly, in its extended analysis of the anticipated impact of this proposed rule, the DOL acknowledges that there may be some negative consequences. For example, employers may incur ongoing managerial costs related to developing work schedules and monitoring hours worked to minimize or avoid overtime. Newly non-exempt workers may lose the flexibility in scheduling that they enjoyed as exempt employees. In addition, they may lose certain benefits offered only to salaried exempt employees. The DOL also acknowledges that the increased labor costs could result in higher prices for consumers and/or reduced profits for employers. And, of course, employers may seek to reduce costs by reducing workers’ hours in order to avoid overtime – thereby disadvantaging lower-wage workers – while workers who remain exempt may see an increase in workload to make up for those hours.

What Happens Now: In addition to the proposed rule, the DOL has also issued Frequently Asked Questions regarding the proposed rule. There will be a 60-day comment period following publication of the Notice of Proposed Rulemaking in the Federal Register. You may submit comments electronically at https://www.regulations.gov/. Once the 60-day period has closed, the DOL will take some time to consider the comments and then subsequently issue the final rule. There will be some period of time after the final rule is issued before it takes effect, which will allow for those employers to plan for compliance.

We will continue to monitor this situation and provide you with updates.

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