On Aug. 30, 2023, the U.S. Department of Labor (DOL) announced a notice of proposed rulemaking (NPRM) that would significantly increase salary threshold amounts required for certain employees to be exempt from federal Fair Labor Standards Act (FLSA) overtime requirements. DOL also issued FAQs summarizing the NPRM.
The FLSA requires most employees to receive the federal minimum wage and overtime pay for all hours worked over 40 in a workweek. However, the FLSA exempts several categories of employees from the overtime requirement of the FLSA, including “white collar” executive, administrative and professional (EAP) employees.
To qualify for one of these exemptions, as a general rule an employee must perform certain job duties (the “duties” test), be paid on a predetermined fixed salary not subject to reduction due to work quality or quantity (the “salary basis” test), and earn a salary above a DOL-determined threshold with some exceptions (the “salary threshold” or “salary level” test).
The salary level currently in effect is $684 per week ($35,568 per year). Under the NPRM, DOL proposes to raise the requirement from $35,568 to at least $55,068 per year. Although the exact amount is not yet known, the proposed new salary-level amount will be set at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region (the South). Thus, using 2022 data, the proposed new salary amount would equal $1,059 per week (which is $55,068 annually for a full-year worker).
DOL also proposes increasing the annual compensation requirement under the special “highly compensated” employee (HCE) exemption from $107,432 to at least $143,988. Again, although the exact amount is not yet known, DOL proposes setting the new HCE amount at the 85th percentile of the earnings of full-time salaried workers nationwide. Based on current data, the new 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.
In addition to these one-time increases, DOL also proposes adopting a mechanism to update automatically the salary-level thresholds every three years based on the percentiles described above.
In addition to the proposed changes discussed above, the NPRM also proposes other, more specialized changes.
- The rule would remove special salary levels currently applied in U.S. territories including Puerto Rico, Guam, the U.S. Virgin Islands and the Commonwealth of the Northern Marianas. Instead, the new rule would impose in those territories the same salary thresholds used in the rest of the country — while maintaining a special EAP salary level (now to be $890) only for American Samoa.
- The rule would increase the special base rate used for certain exempt employees in the motion-picture industry from $1,043 per week to $1,617 per week.
- The rule would add a “severability” provision to 29 C.F.R. Part 541, so “if one or more of the provisions of part 541 is held invalid or stayed pending further agency action, the remaining provisions would remain effective and operative.”
However, as currently proposed, the NPRM would not:
- Change existing duties tests.
- Disturb provisions exempting specific types of employees from salary-basis requirements.
- Revise the rule permitting up to 10% of an employee’s required salary amount to consist of nondiscretionary bonuses, incentive payments and commissions, paid at least quarterly.
Impact and Likely Legal Challenge
DOL estimates the proposed rule will expand overtime requirements to 3.4 million more employees and would move an additional 248,900 employees from the less-demanding HCE duties test to the more-common “primary duty” standard for EAP exemptions.
DOL made a similar but slightly more ambitious attempt to increase the required salary and compensation level amounts in 2016 — to the 40th percentile for the salary requirement for EAP exemptions and the 90th percentile for the HCE exemption, along with automatic updating. A Texas federal court issued a temporary and then permanent injunction halting implementation of the 2016 rule, the appeal of which was left pending in the U.S. Court of Appeals for the Fifth Circuit until it was mooted by the a 2019 DOL rule. The new NPRM is also likely to be challenged.
DOL proposes that a final rule be effective 60 days after adoption, which would result in an adoption period shorter than those allowed in the 2004, 2016 and 2019 updated salary-level rules.
How to Submit Comments
The NPRM is subject to comment from the public. The NPRM was published in the Federal Register on September 8, 2023, triggering the 60-day period to submit comments which will end on November 7, 2023. For assistance in submitting comments regarding the proposed rule or for questions about how it may affect your business or institution, please contact the authors, your McGuireWoods contact or a member of the firm’s labor and employment group.