On August 30, 2023, the Department of Labor (“DOL”) announced its issuance of a Notice of Proposed Rulemaking (“NPRM”). In the NPRM, the DOL proposes to increase substantially the salary threshold for most employees to be “exempt,” that is, ineligible for overtime pay under the Fair Labor Standards Act (“FLSA”).
Under the FLSA, employees are entitled to be paid for hours worked over 40 in a week at the premium rate of time and one-half unless they are exempt from entitlement to overtime pay. The most frequently utilized exemptions are those for employees who are employed “in a bona fide executive, administrative, or professional capacity,” commonly known as the “white collar exemptions.” For an employer to treat an employee as exempt under one of the white collar exemptions, the employer must generally show that three tests are satisfied—(1) the employee’s duties must satisfy the “duties test” for the particular exemption, (2) the employee must be paid on a “salary basis,” and (3) the employee must be paid at or above a specified salary. If the employee’s salary level is high enough to satisfy the “highly compensated employee” standard, the duties test is less robust.
The NPRM proposes to raise the minimum salary for most white collar exemptions from $684 per week ($35,568 per year) to $1,059 per week ($55,068 per year). This proposed rate is based on the 35th percentile of pay for full-time salaried workers in the lowest-wage Census Region (currently the South). The DOL used a similar methodology in making past increases to the minimum salary.
The NPRM also proposes increasing the threshold to qualify as a “highly compensated employee” from $107,432 per year to $143,988 per year. This proposed rate is based on the 85th percentile of pay for full-time salaried workers nationally.
In the NPRM, the DOL is also seeking to establish a procedure for automatically updating both of these thresholds every three years based on the same percentiles and groupings used for determining the thresholds proposed in the NPRM.
The NPRM also proposes to bring US territories that are subject to the federal minimum wage in line with the standard thresholds, largely abandoning the “special” salary levels traditionally applied to US territories. As the only territory not subject to the federal minimum wage, American Samoa will maintain its own salary threshold. Special base rates for employees in the motion picture industry have also been proposed.
The rulemaking process requires agencies to publish their proposed rules and solicit comments from the public before issuing a final rule. Once the NPRM is published in the Federal Register, the public will have 60 days to provide comments, after which the DOL will review comments and either proceed with the current rule or modify the proposal.
In the last two regulatory actions to increase the minimum salary under most white collar exemptions, which are discussed below, the length of the periods from the publication of notices of proposed rulemaking in the Federal Register to the effective dates of the final rules were 17 months and over eight months respectively.
The NPRM is the latest of multiple regulatory actions intended to modify minimum salary standards for the white collar exemptions in the past 20 years.
The DOL last substantially modified the duties tests in 2004. At that time, it also established a minimum salary of $455 per week ($23,660 per year) to qualify for most white collar exemptions and it created the highly compensated employee standard, with a minimum salary of $100,000 per year.
In 2016, as summarized in a Goodwin client alert at the time, the DOL promulgated a final rule that raised the minimum salary level from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) and the threshold to qualify as a highly compensated employee from $100,000 per year to $134,004 per year. That final rule also included a provision that would automatically update threshold salaries every three years. However, before that final rule went into effect, as summarized in another client alert, a federal court issued a nationwide injunction barring the implementation and enforcement of the rule, concluding that by more than doubling the threshold salary, the 2016 final rule “supplants the duties test.”
After the change of administrations, the DOL made more modest increases in these levels in 2019, also as summarized in a client alert, increasing the minimum salary to $684 per week ($35,568 per year) and the threshold to qualify as a highly compensated employee to $107,432 per year. Those are the levels currently in effect.
It can be anticipated that if the final rule provides for the same or similar increases as proposed in the NPRM, a legal challenge like the one that resulted in an injunction against the 2016 final rule will be pursued.
If the rule takes effect as currently proposed, employees whose responsibilities satisfy the duties test of a white collar exemption and who are paid on a salary basis in conformance with current FLSA regulations but have salaries below $55,068 per year will need to be given a raise to at least that level for their employers to continue to treat them as exempt under the FLSA. Otherwise, their employers will need to reclassify them as non-exempt and therefore eligible for overtime pay under the FLSA.
In its comments concerning the proposed rule, the DOL states that 3.4 million workers who are currently classified as exempt under one of the white collar exemptions and earn at least the current minimum salary level are not paid at the currently proposed standard salary level.
State Law Considerations
If the rule takes effect as currently proposed, it will not affect state or local laws that establish higher salary thresholds for exempt status. For example, the current minimum salary for exempt status in California is $64,480 per year and in New York City it is $58,500 per year.
Goodwin will be monitoring developments in the rulemaking process and will update employers on final regulatory changes to the FLSA threshold salary for exempt status. For any questions concerning this development, FLSA compliance or other wage and hour matters, please contact an attorney in Goodwin’s Employment Practice.