You may already be informed about the Department of Labor's recently introduced overtime rule. This rule is currently in a public comment period, which will remain open for 60 days, concluding on October 29, 2023.
The time to act is now. Please see #8 of the FAQs below for information on how to get involved!
On Aug. 30, 2023, the U.S. Department of Labor (DOL) announced a proposed rule to amend current requirements employees in white collar occupations must satisfy to qualify for an overtime exemption under the Fair Labor Standards Act (FLSA).
The FLSA white collar exemptions apply to individuals in executive, administrative, professional, and some outside sales and computer-related occupations. Some highly compensated employees may also qualify for the FLSA white collar overtime exemption.
To qualify for this exemption, white collar employees must satisfy the standard salary level test, among other criteria. This salary level is a wage threshold white collar employees must receive to qualify for the exemption.
The DOL is proposing to increase the standard salary level from:
The proposal does not impose any new requirements on employers at this time. However, employers should become familiar with the proposed rule and evaluate what changes they may need to adopt if the rule is implemented as proposed.
This rulemaking proposes to update and revise the regulations for determining whether certain white-collar salaried employees are exempt from minimum wage and overtime requirements under section 13(a)(1) of the Fair Labor Standards Act (FLSA). Employees are exempt if they are employed in a bona fide executive, administrative, or professional (EAP) capacity as those terms are defined in the Department of Labor’s regulations at 29 CFR part 541. This exemption from the FLSA is sometimes referred to as the “white-collar” or “EAP” exemption.
Currently, to fall within the EAP exemption, an employee generally must:
Certain employees are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers).
The Department is committed to keeping the earnings thresholds up to date for the benefit of both workers and employers. Four years have passed since the 2019 rule, during which time salaried workers in the U.S. economy have experienced a rapid growth in their nominal wages, which lessens the effectiveness of the current salary level threshold. Through this rulemaking, the Department seeks to update the salary level test to identify more effectively who is employed in a bona fide executive, administrative, or professional capacity and ensure that the FLSA’s intended overtime protections are fully implemented.
In addition to updating the salary level to account for increased wages, the Department’s proposal would ensure that the salary level effectively performs its historic function of screening nonexempt employees from the overtime exemption and would more effectively account for the switch from a two-test to a one-test system.
In this rulemaking, the Department proposes to:
The Department is not proposing changes to the standard duties test, consistent with its approach in both the 2016 and 2019 rules. At this time, the Department favors keeping the current standard duties test, which is well known to employers and employees. As 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.
The Department's Notice for Proposed Rulemaking (“NPRM”) is available at http://www.regulations.gov. The Department encourages all interested parties to participate in the rulemaking process by submitting written comments regarding the NPRM within 60days from the publication date in the Federal Register.
The FLSA does not provide an exemption for small businesses. Generally, the FLSA and the proposed rule apply to employees of enterprises that have an annual gross volume of sales made or business done of $500,000 or more, and certain other businesses. The FLSA creates a level playing field for businesses by setting a floor below which employers may not pay their employees.
There is no exemption for nonprofit organizations under the FLSA or in the proposed rule. Thus, the proposed rule may impact nonprofit organizations that have an annual dollar volume of sales or business done of at least $500,000. In determining coverage, only activities performed for a business purpose are considered. Charitable, religious, educational, or similar activities of organizations operated on a nonprofit basis where such activities are not in substantial competition with other businesses are not considered. Employees of employers that are not covered by the FLSA on an enterprise basis may still be entitled to its protections if they are individually engaged in interstate commerce.
Section 13(a)(1) of the FLSA exempts individuals employed in a “bona fide executive, administrative, or professional capacity” from the Act’s minimum wage and overtime requirements. Certain computer professionals and outside sales employees are included in the exemption and therefore excluded from the minimum wage and overtime requirements. The FLSA instructs the Department to issue regulations that define and delimit the EAP exemption; those regulations are located at 29 CFR part 541.
Job titles do not determine exempt status, and the fact that a white-collar employee is paid on a salary basis is not sufficient to exempt that employee from the FLSA’s minimum wage and overtime requirements. For an exemption to apply, an employee’s specific job duties and salary must meet all of the applicable requirements provided in the Department’s regulations.
The FLSA provides minimum standards and does not preempt a state from establishing more protective standards. If a state establishes a more protective standard than the provisions of the FLSA, the higher standard applies in that state. This would include, for example, exemption criteria for EAP employees under state law with higher earnings thresholds than those provided in the Department’s federal regulations.
Under the current regulations, an executive, administrative, or professional employee generally must be paid at least $684 per week (equivalent to $35,568 annually for a full-year employee) to be exempt from the FLSA overtime protections. This $684 per week threshold is the standard salary level. A computer professional may be exempt if they are paid at least $684 per week or at least $27.63 an hour, if paid on an hourly basis. There is no salary level test required to qualify as an exempt outside sales employee. Certain professionals including doctors, lawyers, and teachers are also not subject to the salary tests. Finally, the current regulations also contain a less restrictive duties test for certain highly compensated employees who receive total annual compensation of $107,432 or more and are paid at least $684 per week.
In updating the standard salary level, the Department seeks to identify more effectively who is employed in a bona fide executive, administrative, or professional capacity. The proposal updates the standard salary level to account for earnings growth since the 2019 rule and adjusts the salary level methodology based on the lessons learned in recent rulemakings.
The Department is proposing to set the Highly Compensated Employee (HCE) annual compensation level equal to the 85th percentile of earnings for full-time salaried workers nationwide. Based on current data, the proposed HCE threshold would be$143,988 per year, of which at least $1,059 per week (the proposed standard salary level) would have to be paid on a salary or fee basis. The Department believes that its proposed methodology results in an HCE level that is low enough to not restrict the use of the HCE test for employers in low-wage regions and industries, and high enough to guard against the unintended exemption of workers who are not bona fide executive, administrative, or professional employees in higher-income regions and industries.
The Department is proposing a mechanism to automatically update the earnings thresholds every three years to ensure that they remain effective tests for exemption. If finalized, this proposal would ensure that the Department can timely and efficiently update the earnings thresholds in future years to reflect current wage data. Experience has shown that the salary level test is a strong measure of exempt status only when it is up to date. Left unchanged, the test becomes substantially less effective as
wages for overtime-protected workers increase over time. Automatically updating the salary level and HCE total annual compensation requirement using the most recent data will ensure that these tests continue to accurately reflect current economic conditions.
The Department is proposing to update the standard salary level and the HCE total compensation requirement every three years to reflect current earnings data. Specifically, the Department is proposing to update the standard salary level by adjusting it to remain at the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region (currently the South). The Department is proposing to update the HCE total annual compensation requirement to remain at the annualized weekly earnings of the 85th percentile of full-time non-hourly workers nationally. The Department proposes to update both of these thresholds using the most recent available four quarters of data, as published by BLS, preceding the publication of the Department’s notice to automatically update the thresholds.
Because the proposed special salary level for American Samoa and the base rate for the motion picture industry are set in relation to the standard salary level, those earnings thresholds would also reset at the time the standard salary level is updated. At least 150 days before the date of the update of the standard salary level and the HCE total annual compensation requirement, the Department would publish in the Federal Register a notice with the new earnings levels described above.
The Department’s proposal includes a provision allowing the Department to temporarily delay a scheduled automatic update where unforeseen economic or other conditions warrant. This feature would afford the Department added flexibility to adapt to unforeseen circumstances without sacrificing the benefits provided by automatic updating.
The Department estimates that in Year 1, the proposed rule would impose $1.2 billion of direct costs on employers, including
$427.2 million in regulatory familiarization costs, $240.8 million in adjustment costs, and $534.9 million in managerial costs. The Department estimates that the proposed rule would result in a Year 1 income transfer of $1.2 billion from employers to employees, predominantly from new overtime premiums, or pay raises to maintain the exempt status of some affected employees. Beyond these wage transfers, the proposal could reduce the risk of misclassification, increase worker productivity, reduce employee turnover, and increase personal time for workers according to the DOL.
In the first year, the Department estimates that 3.4 million workers exempt under the current regulations who earn at least the current weekly salary level of $684 but less than the proposed salary level of $1,059 would, without some intervening action by their employers, become newly entitled to overtime protection under the FLSA.
Similarly, the Department estimates that an additional 248,900 workers who earn at least $107,432 per year (the current HCE total annual compensation level) and who meet the minimal HCE duties test but not the standard duties test, would, without some intervening action by employers, become eligible for overtime if the HCE total annual compensation level were increased to the proposed level of $143,988 per year.
Source: U.S. Department of Labor – Frequently Asked Questions for the Notice of Proposed Rulemaking: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees
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