The United States Department of Labor (DOL) recently proposed a major change that would render 3.6 million workers eligible for overtime pay who were previously considered "exempt." Specifically, DOL announced that it would raise the salary threshold required to classify an employee as exempt from $684 per week to $1,059. If finalized as proposed, this rule will require significant changes in employers' compensation practices.

Description of the Proposed Changes

The federal Fair Labor Standards Act (FLSA) requires that employees be paid an overtime premium of 1.5 times their regular rate of pay for all hours worked beyond 40 in a workweek. However, if an employee qualifies for an exemption, then an employee is not entitled to overtime pay. In order to be eligible for the most common exemptions—the administrative, executive, or professional exemptions (collectively referred to as the "white-collar" exemptions)—employees must meet three criteria: (1) be paid on a salary basis; (2) be paid at least the designated minimum weekly salary; and (3) perform certain duties.

Currently, the salary threshold required to satisfy (2) is $684 per week ($35,568 annualized). The DOL's new proposal would raise the rate significantly to $1,059 per week ($55,068 annualized). This salary threshold would be applied in U.S territories subjected to the federal minimum wage save for some exceptions. The salary threshold would automatically update every three years.

In addition, the proposed rule would raise the threshold for another exemption—the "highly compensated employee" exemption—from $107,432 to $143,988.

Path From a "Proposed Rule" to Finalization

The DOL's proposed rule is just that, a proposal. The next step is a notice-and-comment period during which interested parties can review the proposal and provide feedback. The comment period will be open for 60 days upon publication in the Federal Register. It may be extended based on the number of comments received. After the comment period closes, the agency must consider each comment and determine whether and how to adjust the proposed rule before finalizing it. The agency will then issue a final rule that takes the comments into account, becoming effective within a few weeks of finalization. The DOL's proposed rule could become law as soon as 2024.

What Should Employers Do Now

If finalized as proposed, this Rule will significantly increase the number of employees eligible for overtime under the FLSA. Employers should work with counsel to start planning now. Among other things, employers should start thinking about the following:

  1. How many employees are being excluded from overtime pursuant to a "white-collar" exemption? Of those, how many will no longer qualify under the DOL's proposed rule?
  2. How do you currently record employees' work time? What changes would you have to make to accurately keep time records for employees who would be rendered non-exempt following the DOL's proposed rule?
  3. Assess the impact of reclassifying certain employees as non-exempt. To this end, you may want to consider tracking the time worked by exempt employees who may be impacted now.
  4. Consider how these changes may impact other policies, like paid time off, vacation, or sick leave as well as things like the use of company equipment or devices (i.e., smartphones) to the extent that your policies differentiate between exempt and non-exempt employees.
  5. Understand the interaction with applicable state law. Among other things, identify the amount of advanced notice required by state law in the event that changes to your compensation policy are required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.