United States: Department Of Labor Proposes Updates To Salary Level Requirements Under The Fair Labor Standards Act

On Friday, September 8, 2023, the comment period opened on the Department of Labor's (DOL) proposed rule to define and delimit the exemptions for executive, administrative, and professional employees (commonly referred to as the "white collar" exemptions) set forth under the Fair Labor Standards Act (FLSA). Specifically, the DOL seeks to update the salary level thresholds for exemption from minimum wage and overtime requirements.

The Fair Labor Standards Act

The FLSA generally requires covered employers to pay employees a minimum wage and overtime at a rate of 1.5 times the employee's regular rate of pay for all hours worked in excess of 40 in a given workweek. However, the FLSA exempts "any employee employed in a bona fide executive, administrative, or professional capacity"¹ from such requirements. Over the past 80 years, to be considered exempt, employees typically must meet three tests: (1) the salary basis test, which requires that the employee be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the salary level test, in which the total salary paid must meet a minimum specified amount; and (3) the duties test, in which the employee's job duties must primarily involve exempt duties (as defined by regulations to include acting in a managerial role, performing office or non-manual work, and/or performing predominantly intellectual work, all of which must include an exercise of discretion and independent judgment, etc.).²

Highly compensated employees (HCEs) are a subset of exempt employees subject to a variation of the white-collar exemptions. To qualify as an HCE, an employee must reach a higher salary requirement but is subject to a less stringent, minimal duties test. More specifically, an HCE must customarily and regularly perform only one of the duties of an exempt executive, administrative, or professional employee. This addition was meant to offer a streamlined test for employees "at the very top of the economic ladder," as "a very high level of compensation is a strong indicator of an employee's exempt status, thus eliminating the need for a detailed duties test."³

Proposed Changes

The DOL's proposed rule sets forth the following changes:

1. An increase to the minimum salary level for the executive, administrative and professional exemptions from $694 per week ($35,568 annualized) to $1,059 per week ($55,068 annualized);
2. An increase to the minimum salary level for HCEs from $107,432 to $143,988;
3. Implements an automatic updating mechanism, which would update all earnings thresholds every three years. However, in response to concerns regarding an automatic updating mechanism's lack of adaptability in response to unforeseen circumstances, this currently proposed automatic updating mechanism would also temporarily delay a scheduled automatic update if the DOL were engaged in notice-and-comment rulemaking to either: (i) change the salary level methodology; and/or (ii) update the mechanism itself; and
4. Includes a severability provision in part 541 of the FLSA. While this inclusion is not called out explicitly in the notice of proposed rulemaking summary, the provision, if adopted as drafted, would set this proposed rule apart from all previous changes to the FLSA. Specifically, rather than invalidating the entire proposed rule if one change is invalidated, including a severability provision could result in the automatic updating mechanism being included and applied to the existing salary level thresholds, even if all other proposed changes are determined to be invalid.

No Changes to Duties Test or Inclusion of Incentive Pay

The proposed rule retains the benefits of the simplified standard duties test, as was done in the 2004, 2016, and 2019 rulemakings, which the DOL believes results in a benefit to employees and employers based on the efficiency and simplicity of its application. Moreover, in response to previous concerns that such an increase to earnings thresholds would cause the salary levels test to override the duties test, the DOL posits that even with the increased compensation threshold, the duties test will still determine exempt status for almost three-quarters of all salaried white-collar employees.

In addition, the rule as proposed retains the incentive pay allowance, which provides that employers may continue to satisfy up to 10% of an employee's annualized salary level via nondiscretionary bonuses, commissions, and other incentive pay.

Projected Impact

The DOL estimates the impact of these changes, if implemented as proposed, would result in the following potential employee classification changes in year 1:

• 3.4 million currently exempt employees would, absent a pay increase, lose their exemption status and gain overtime protections; and
• 248,900 employees currently exempt under the highly compensated employee analysis would, absent a pay increase, lose their exemption status based on an inability to meet the standard duties test (rather than the minimal duties test that applies to employees earning at or above the highly compensated employee threshold).

DOL Justifications and Considerations

In presenting its proposal, the DOL makes clear its desire to update salary thresholds to account for earnings growth and inflation, as well as the need to adjust the salary calculation methodology in light of how previous changes to the regulations have disparately impacted employees. By increasing salary thresholds, the DOL can better fulfill its obligation to define who is considered a bona fide executive, administrative, and professional employee, as "even a well-calibrated salary level that is not kept up to date becomes obsolete as wages for non-exempt workers increase over time."⁴

The Comment Period

The comment period is set to expire at 11:59 p.m. on Tuesday, October 7, 2023 (60 days from the start of the comment period). If inclined, comments may be submitted to the DOL regarding any of the proposed changes. The Wage and Hour Division's "how to" guide for submitting comments can be found here. As is standard procedure, all comments will become a matter of public record and will be posted without change to regulations.gov.

What Employers Can Do to Prepare

In addition to submitting a comment, employers may consider the following action items while we await publication of a final rule:

• Although legal challenges to this proposed rule, if enacted, are likely, employers may wish to start evaluating employees now under the proposed standard and consider: (i) the financial and administrative feasibility of implementing a potentially stark pay increase to retain exempt classifications; (ii) implementing timekeeping procedures for an employee who will lose the exempt classification and become eligible for overtime and/or (iii) modifying other policies and procedures, such as telecommuting rules, that may need to address non-exempt work schedules.
• Prepare for a Wage and Hour audit. In the past year, the Wage and Hour Division hired over 100 new investigators and included "misclassification" as one of the Division's top priorities. As such, employers can expect that, if enacted, enforcement of the regulations will be prompt and will include an employee classification analysis.

Footnotes

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