U.S. Department of Labor Proposed Salary Rule Changes

by Michael Castaldo III

The United States Department of Labor has initiated a substantial change in labor regulations through a proposed rule change to expand minimum wage and overtime pay eligibility to workers who were previously considered exempt. This rulemaking has the potential to impact millions of employees and employers.

The federal Fair Labor Standards Act requires covered employers to (1) pay employees a minimum wage, and (2) pay overtime premium pay of at least 1.5 times the employee’s regular rate of pay if they exceed their overtime threshold (in the ordinary private employer context, 40 hours in a workweek).

Section 213(a)(1) of the Act, however, exempts employers from having to pay overtime to “any employee employed in a bona fide executive, administrative, or professional capacity.” This exemption is commonly referred to as the “white-collar” exemption, or otherwise the executive, administrative, or professional (or, “EAP”) exemption.

Since 1940, the regulations implementing the EAP exemption have required three things before it can apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test). The employer always bears the burden of establishing the applicability of the EAP exemption.

On August 23, 2004, controversial changes to exemptions from the FLSA’s minimum wage and overtime requirements went into effect, making substantial modifications to the definition of an “exempt” employee. Low-level working supervisors throughout American industries were reclassified as “executives” and lost overtime rights. In addition, a new test for exemption for HCE’s was implemented.

So, in May 2016, the Department of Labor issued a rule that retained above tests, but aggressively increased the standard salary level as well as provided for regular updating. The 2016 rule was greeted with litigation and never became effective.

In September, 2019, the Department released a rule setting the salary level or amount test at $684 per week (equivalent to $35,568 per year) in order for an employee to qualify as an FLSA-exempt executive employee, administrative employee, and professional employee. In order to qualify as a highly compensated employee, the total annual compensation test was set at $107,432. When the Department had determined the total annual compensation, it based it on the 80th percentile of weekly earnings for full-time salaried employees in the United States.

The Department now seeks to change that salary threshold. On September 8, 2023, the Department’s Wage and Hour Division published a notice of proposed rulemaking entitled “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees.” The rulemaking includes significant revisions include increasing the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region and increasing the highly compensated employee (“HCE”) total annual compensation threshold to the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally. The Department is also proposing to maintain the effectiveness of these earnings thresholds by adding a provision to automatically update the standard salary level and the HCE annual compensation threshold every 3 years with current wage data.

Department reasons that the proposed increase in the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region better will better define and delimit who is employed in a bona fide EAP capacity. By setting a salary level above what the methodology used in 2004 and 2019 would produce using current data, the proposal Salary Rule Changes would ensure that, consistent with the Department’s historical approach to the exemption, fewer lower-paid white-collar employees who perform significant amounts of nonexempt work are included in the exemption. At the same time, by setting the salary level below the methodology used in 2016, the proposal would allow employers to continue to use the exemption for many lower-paid white-collar employees who were made exempt under the 2004 standard duties test. It remains hopefully that this combined effect would be a more effective test for determining who is employed in a bona fide EAP capacity.

In effect, the Proposed Rule is set to increase the standard salary level for the EAP exemption to $1,059 per week (or $55,068 per year) from its current threshold of $684 per week (equivalent to $35,568 per year) and increase the highly compensated employee total annual compensation threshold to $143,988 from the current threshold of $107,432.

However, it is important to consider that this proposed rule is still in its preliminary stages, and there is no guarantee it will become effective in its current form. As of the date of this article, the proposed rule remains in the 60-day notice and comment period. Interested persons can submit written comments on or before November 7, 2023. After the conclusion of this comment period, the Department will review all comments and make necessary adjustments to the proposed rule. A final rule will then be issued, which may become effective as early as 2024.

If you have any specific questions on whether or how these changes may affect you should this proposed rule become effective, please do not hesitate to contact one of the attorneys at Ottosen DiNolfo Hasenbalg & Castaldo, Ltd.