A Proposed Federal Rule May Result in Employers Paying Overtime Compensation to More Employees in the Future

On August 30, 2023, the United States Department of Labor (DOL) issued a Notice of Proposed Rulemaking that, if approved, would increase the number of workers entitled to overtime compensation by more than three million workers.  The proposed rule was published in the Federal Register on September 8, 2023, and is subject to a sixty (60) day comment period, which expires on November 7, 2023.

The specific language of the proposed rule can be found on the DOL’s website: Wage and Hour Division, Overtime NPRM.

Overtime Under the Fair Labor Standards Act—

The Fair Labor Standards Act (FLSA) requires employers to pay employees a minimum wage (currently $7.25 an hour) and, for employees who work more than forty (40) hours in a week, overtime compensation of at least 1.5 times the employee’s regular rate of pay.  The FLSA exempts from the minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional capacity.”  The employee’s “primary duty” must be the performance of exempt work.  The term “primary duty” means the principal, main, major, or most important duty that the employee performs.  This exemption is commonly referred to as the “white-collar” or executive, administrative, or professional (EAP) exemption.

In 2004, the DOL modified the FLSA regulations to establish an exemption for highly compensated employees (HCE), which applies when an employee receives a very high annual compensation.  In such situations, the employee will be classified as exempt from the overtime pay requirements based on a “minimal duties” test instead of the primary duties analysis for EAP exempt employees.  The purpose of the HCE exemption is to offer a streamlined alternative for highly compensated employees because a very high level of compensation is a strong indicator of an employee’s exempt status, thus eliminating the need for a primary duties analysis.

Anticipated Changes to the Fair Labor Standards Act Regulations—

1. The EAP Exempt Employee Salary Level Test—

The DOL utilizes a three-prong test to determine whether an employee is a bona-fide executive, administrative, or professional employee eligible for the EAP exemption.  For an employee to be exempt, the employee must: (1) be paid a predetermined and fixed salary not subject to reductions based on the quality or quantity of work performed (“salary basis test”), (2) be paid a salary amount meeting the minimum threshold amount determined by the Secretary of Labor, (“salary level test”), and (3) primarily perform executive, administrative, or professional duties (“duties test”).

The proposed rule seeks to increase the EAP exemption’s salary level test amount from $684/week ($35,568 annually) to $1,059/week ($55,068 annually).  The effect of this change would mean that employees receiving a salary of less than $1,059/week would be entitled to overtime compensation, even if they met the other two (2) prongs of the EAP exemption test.

2. Highly Compensated Employees Exemption—

The proposed rule also seeks to increase the total annual compensation amount for an employee to qualify for the HCE exemption.  The current HCE provision provides that an employee is exempt from the FLSA’s overtime provisions when (1) the employee receives a total annual compensation of $107,432 and (2) regularly performs duties of an executive, administrative, or professional nature.  The term “total annual compensation” includes at the EAP salary level test amount paid to the employee, plus any commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period.  The “total annual compensation” does not include credit for board, lodging, or other facilities, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits.

The proposed rule would increase the total annual compensation amount from $107,432 to $143,988.  This change would mean that employees who earn less than $143,988 in total annual compensation must meet the EAP exemption test, or they would be entitled to overtime compensation.

3. Recurring and Automatic Three-Year Salary Level Updates—

In addition to the above-referenced minimum salary increases, the proposed rule would establish an automatic, three (3)-year, compensation threshold adjustment under both the EAP and HCE exemptions to keep up with contemporary wages and inflation.  For example, under the proposed rule the EAP compensation threshold ($1,059/week) is based on the 35th percentile of weekly earnings of full-time salaried workers in the lowest wage-census region.  With this proposed rule, the DOL seeks to apply this formula for the EAP exemption every three (3) years to set a new compensation threshold.  The DOL claims this will provide predictability and uniformity to a regulatory scheme that has been in flux over the past several decades. 

Teachers and School Administrators

If adopted, the proposed rule will not impact teachers.  Teachers are not subject to the EAP exemption’s salary level or salary basis tests if their primary duty is “teaching, tutoring, instructing or lecturing in the activity of imparting knowledge” for a school district. 

School administrators, including superintendents, curriculum coordinators, assistant principals, and principals, may be impacted by the proposed salary level test.  To be exempt, school administrators must earn at least the same salary as an entry-level teacher in the employing school district or the present EAP exemption’s salary level test, whichever is less. 

Timeline for Implementation—

A proposed rule is not binding.  The final rule will not be binding until the rule is published, which cannot occur until the public comment period expires on November 7, 2023.  Comments may be submitted using this link: NPRM Comment Link.

In 2016, the DOL proposed a similar increase to the salary level test amount, but that rule was blocked in federal court shortly after it was published and before it could be implemented.  Similar legal actions may occur if DOL publishes a finalized rule this time.  Thus, it is not necessary to change any employee compensation right now.  However, employers should start examining how the proposed rule may affect their employee compensation models.  We will continue to monitor and update clients on the DOL’s efforts to change the salary level thresholds used for overtime exemption tests under the FLSA.