What Employers Should Know Now: DOL Proposes Significant Changes to Overtime Exemptions

Background

The FLSA requires covered employers to pay employees a minimum wage and overtime premium pay of at least 1.5 times the employee’s regular rate of pay for those employees who work more than 40 hours in a week. The FLSA provides exemptions from this requirement, however, for employees in executive, administrative, or professional positions, commonly dubbed the “white-collar exemptions.” To qualify for these exemptions, the employee must: (1) be a salaried employee; (2) have a salary that meets a minimum specified threshold; and (3) have job duties that primarily involve executive, administrative, or professional duties as defined by the regulations.

Under the proposed rule, the DOL would raise the minimum weekly salary threshold for the white-collar exemptions by over 50% from $684 per week to $1,059 per week (equivalent to an annual salary of $55,068). That said, the increase could be even higher because the DOL reserved in the proposed rule the ability to alter the proposed increase based on the most recent data available when the rule is finally promulgated. Indeed, the DOL projects the minimum salary threshold to be as high as $1,140 per week ($59,285 annualized) by the third quarter of 2023 and $1,158 ($60,209 annualized) in 2024—an increase of nearly 70% from the current $35,568 salary level. The DOL also seeks to increase the annualized salary threshold for the exemption for “highly compensated employees” (HCE) from $107,432 per year to $143,988 per year, a 25% increase. The DOL further proposes automatically updating these salary thresholds every three years. Lastly, the new salary levels also will apply to workers in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands.

Considerations for Employers

Importantly, the proposed rule described above has not been finalized yet. All interested parties, including employers, have an opportunity to submit written comments addressing any concerns or opinions they may have about the NPRM by November 27, 2023, and can be submitted by clicking here. Once the commenting period closes, the DOL will consider the comments and issue a final rule with an effective date at least 30 days from the date of the final rule.

In the meantime, employers should consider and prepare for the potential impact the proposed rule may have on their business. Key considerations for employers include the following:

• Employers that currently have exempt workers earning more than $684 per week but less than $1,059 per week (or even $1,140 per week) should consider the respective costs associated with either having to increase the employees’ salaries to meet the proposed threshold or reclassifying them as nonexempt, in which latter case any time worked over 40 hours in a week would be compensated at a rate of 1.5 times the employee’s “regular rate.”
• In deciding whether to reclassify employees as nonexempt, employers must keep in mind that the term “regular rate” is not simply the employee’s hourly rate but rather includes “all remuneration for employment paid to, or on behalf of, the employee” with limited exceptions. Therefore, employers should evaluate whether each currently exempt employee’s job duties consistently require them to work over 40 hours. Indeed, for those exempt employees who typically work 50-70 hours per week, the cost of paying them overtime for all time worked over 40 hours a week may be even more expensive than increasing their salary to meet the new threshold. Employers also could consider, as an alternative, redistributing some of these employees’ duties to other employees to reduce overtime costs.
• In deciding whether to increase employees’ salaries to continue classifying them as exempt, employers should consider the implications of the automatic three-year salary threshold increase in the proposed rule. Employers should assess whether they can sustain periodic salary increases to maintain these employees’ exempt status.
• Employers should not forget to consider other consequences of any decisions the employers make regarding classifying/reclassifying their employees going forward; namely, whether there will be a need to hire additional employees, update employee handbooks and policies, revise company budgets, and provide training to reclassified employees regarding these changes. Moreover, any decision an employer makes to respond to the DOL’s rule could have a material impact on employee morale. Therefore, messaging about any change is bound to be critically important.

Although we expect there to be significant litigation over the implementation of the rule after the final rule is promulgated, employers should understand how the rule may affect them and their business model. Given the rule’s potential impacts and the immense burden it may place on employers, employers should promptly begin discussing and planning the best course of action to prepare for the anticipated changes. Klehr Harrison’s Labor and Employment Practice Group will continue to monitor these and other relevant developments in the law and, as always, are available to discuss any potential impact these developments may have on your organization.

Co-authors Lee Moylan, chair, and Monica Matias, associate, are members of the labor and employment practice at Klehr Harrison.