If it becomes final, the proposed rule would have a major impact on employers across all industries that utilize the EAP exemptions.
On August 30, 2023, the Department of Labor (DOL) unveiled its long-awaited proposal to update the “white collar” overtime exemption regulations applicable to executive, administrative and professional (EAP) employees under the Fair Labor Standards Act (FLSA). The proposed rule focuses entirely on the FLSA’s salary level test for the exemptions, and most notably, increases the standard minimum salary level to $1,059 per week, a nearly 55 percent increase from its current level of $684 per week.
If it becomes final, the proposed rule would have a major impact on employers across all industries that utilize the EAP exemptions. The proposed rule would require employers to reevaluate the classification status of exempt employees currently paid a salary below $1,059 per week, to the extent such exempt employees are not already paid a higher minimum salary under state law.
The proposed rule also increases the annual salary threshold for “highly compensated employees” (HCE) from $107,432 to $143,988, establishes a procedure to update the earnings thresholds every three years, applies the standard minimum salary level applicable to certain U.S. territories, and increases the special base rate applicable to certain motion picture industry employees.
To classify an employee as exempt from the FLSA’s minimum wage and overtime requirements pursuant to the EAP exemptions, an employer must generally show, subject to certain exceptions, that the employee meets the following three tests: (1) is paid a minimum salary level, (2) is paid on a salary basis and (3) performs certain job duties.
In 2004, the DOL updated its regulations to set the minimum salary level applicable to the “white collar” exemptions at $455 per week (or $23,660 annually for a full-time worker) and to relax the “job duties” test for “highly compensated” employees (at the time, those earning at least $100,000 annually).
The 2016 Rule
During the Obama administration, the DOL issued a final rule in May 2016 that increased both the standard and HCE earnings thresholds and provided for their regular updating.
The 2016 rule, among other things, (1) increased the standard minimum salary level from the 2004 salary level of $455 to $913 per week, the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region (the South); (2) increased the HCE annual salary threshold from $100,000 to $134,004 per year (annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally); (3) allowed employers, for the first time, to credit nondiscretionary bonuses, incentive payments and commissions paid at least quarterly toward up to 10 percent of the standard minimum salary level; and (4) added a mechanism to update the earnings thresholds automatically every three years.
However, in November 2016, the U.S. District Court for the Eastern District of Texas granted an emergency motion for a preliminary injunction to block the 2016 rule from going into effect on December 1, 2016. In doing so, the court held that while the FLSA’s accompanying regulations give the DOL “significant leeway to establish the types of duties that might qualify an employee for the exemption, nothing in the [white collar] exemption indicates that Congress intended the Department to define and delimit with respect to the minimum salary level.” The significant increase to the salary level, in the court’s opinion, essentially created a “de facto salary-only test,” and Congress “did not intend salary to categorically exclude an employee with [white collar] duties from the exemption.”
The Department of Justice appealed the ruling, but shortly after the presidential election and change in administration, the Trump administration dropped the appeal and rescinded the 2016 rule.
The 2019 Rule
In September 2019, the DOL under the Trump administration published its own final rule regarding the “salary level” test.
The 2019 rule, among other things, (1) increased the standard minimum salary level from the 2004 salary level of $455 to $684 per week, the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region (the South); (2) increased the HCE annual salary threshold from $100,000 to $107,432 per year (annualized value of the 80th percentile of weekly earnings of full-time salaried workers nationally); and (3) allowed employers to credit nondiscretionary bonuses, incentive payments and commissions paid at least quarterly toward up to 10 percent of the standard minimum salary level. The 2019 rule abandoned the automatic updating mechanism, noting it would “deprive the department of flexibility to adapt to unanticipated circumstances.”
The 2019 rule went into effect on January 1, 2020.
The Proposed Rule
Like its 2016 and 2019 counterparts, the rule proposed by the Biden administration focuses on the earnings thresholds for the “white collar” exemptions, specifically:
Standard Minimum Salary Level
The DOL proposes to increase the standard minimum salary level for the “white collar” exemptions from $684 to $1,059 per week (or $55,068 annually for a full-time worker), the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region (currently the South). The DOL estimates that this proposed increase would affect 3.4 million exempt employees who currently earn at least the current minimum salary of $684 per week but less than the proposed amount of $1,059 per week.
HCE Annual Salary Threshold
The DOL proposes to increase the HCE annual salary threshold from $107,432 to $143,988 (annualized value of the 85th percentile of weekly earnings of full-time salaried workers nationally). The DOL estimates that this proposed increase would affect nearly 250,000 HCEs who meet the current threshold of $107,432 and the relaxed job duties test applicable to HCEs but do not meet the full job duties test.
Automatic Triennial Updates
The DOL also proposes to update the above earnings thresholds every three years. The proposed rule explains that it believes this automatic process is necessary due to historically lengthy gaps between rulemakings (which it says resulted in ineffective thresholds), although in recent years, rulemakings occurred at much shorter intervals, i.e., 2016, 2019 and now, 2023.
The proposed automatic process involves adjusting (1) the standard minimum salary level to remain at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region and (2) the HCE annual salary threshold to remain at the annualized value of the 85th percentile of weekly earnings of full-time salaried workers nationally.
The DOL would publish in the Federal Register and the Wage and Hour Division’s website a notice with the new earnings thresholds at least 150 days before the date of the update and could pause the automatic update to engage in rulemaking for 120 days following the automatic update date (before it took effect on the 121st day).
Anticipating challenges to the standard minimum salary level, the DOL expressly addresses the severability of this automatic update provision, indicating that the DOL intends the proposed automatic updating mechanism to take effect, even if the earnings threshold increases do not take effect.
The DOL has also proposed certain earnings threshold updates specific to the U.S. territories and the motion picture producing industry.
First, the DOL proposes to apply the increased standard minimum salary level to the four U.S. territories currently subject to the federal minimum wage, i.e., Puerto Rico, Guam, the U.S. Virgin Islands and the Commonwealth of the Northern Mariana Islands. The 2019 rule had preserved the 2004 standard minimum salary level of $455 per week for those territories.
The DOL also proposes to update the special salary level for America Samoa equal to 84 percent of the proposed standard minimum salary level of $1,059 (or $890 per week). This percentage is the same as in the 2004 rule for American Samoa. The 2019 rule maintained the 2004 level ($380 per week).
In addition, the DOL proposes to update the special base rate applicable to exempt employees in the motion picture producing industry. The DOL proposes an increase in the special base rate from $1,043 per week to $1,617 per week (or a proportionate amount based on the number of days worked).
What This Means for Employers
The proposed rule, if finalized in its current form, would require employers to evaluate the classification status of their exempt employees currently earning below the proposed standard minimum salary level of $1,059 per week. While the DOL’s proposed earnings thresholds may face the same legal challenges as the 2016 rule faced, employers should nonetheless determine the affected positions at their organization and develop a preliminary plan to respond to the anticipated increases.
This is particularly important for this proposed rule because, if finalized, it will become effective much faster than usual (within 60 days instead of the previous 90 or 180 days given for compliance). According to the DOL, the shortened time for implementation is appropriate “in part because employers and employees are familiar with the procedures in the current regulations from the 2019 rulemaking and changed economic circumstances have caused a strong need to update the standard salary level.”
Employers must decide whether to increase an exempt employee’s salary to meet the increased salary threshold or convert the employee to nonexempt status. The process of evaluating options and making decisions on classification status requires careful consideration of numerous factors. For example, to make an informed decision, employers may want to track hours worked by the affected positions to assess how much overtime the employer would be required to pay in a typical work week if the exempt employee becomes nonexempt.
This process also requires employers to determine how they would pay their reclassified employees. Employers may opt to continue to pay salaries to workers reclassified to nonexempt status, but must ensure proper calculation of these employees’ regular rates of pay for overtime purposes, which must factor in nondiscretionary bonuses, commissions and other types of compensation.
In addition, employers must assess the logistical challenges of implementing processes to track and record hours worked by previously exempt workers. The company may want to explore whether alternative time-keeping technology is better suited to ensure reclassified workers accurately record time worked.
Further, employers should consider the negative impact on employee morale that may stem from reclassifying employees as nonexempt. Employees who were exempt may not want to track and record their hours worked and may be upset at the loss of flexibility they previously enjoyed as exempt workers.
Due to the time it takes to work through these issues, it would be better for employers to begin this process immediately, with the assistance of counsel, rather than take a wait-and-see approach.
However, employers should await publication of the final rule before implementing any changes in response to the proposed rule.
Employers and business groups that wish to submit public comments regarding the proposed overtime regulations should begin preparing to do so, as the proposed rule is expected to be published in the Federal Register imminently, which then begins the public comment period of 60 days following publication.
In addition to seeking general comments on its proposed increases, the DOL specifically requested comments on alternate salary methodologies and its proposed effective date of 60 days after publication of a final rule.
Employers should also take the opportunity to review any governing state law requirements, since certain states use higher salary thresholds than those in the proposed rule, including California (currently $1,240 weekly or $64,480 annually, increasing to $1,280/$66,560 effective January 1, 2024) and New York (currently $1,125 weekly or $58,500 annually for NYC, Westchester and Long Island and $1,064.25 weekly and $55,341 annually for the rest of the state, expected to increase respectively to $1,200/$62,400 and $1,124/$58,500 effective January 1, 2024).
For More Information
If you have any questions about this Alert, please contact Eve I. Klein, Christopher D. Durham, Caroline M. Austin, Natalie F. (Hrubos) Bare, Ivan Munoz, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
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