On Aug. 30, 2023, the U.S. Department of Labor (DOL) released a proposed rule that would increase the minimum salary required to qualify for exemptions from overtime for administrative, professional, executive and highly compensated employees. Here are answers to some frequently asked questions about the proposed rule.
Q: What are the exemptions from overtime for administrative, professional, executive and highly compensated employees?
A: The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain administrative, professional and executive employees. To be considered "exempt," these employees must satisfy specific salary and duties tests:
- Meet the minimum salary requirement (currently $684 per week, $35,568 annually, based on the 2019 Final Rule that became effective on Jan. 1, 2020);
- With very limited exceptions, the employer must pay the employee their full salary in any week they perform work, regardless of the quality or quantity of the work; and
- The employee's primary duties must meet certain criteria.
There is also a special exemption for "highly compensated employees" who are paid a total annual compensation of at least $107,432 per year (currently at least $684 must be paid on a weekly salary basis) (this amount is based on the 2019 Final Rule that became effective on January 1, 2020) and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
Q: What did the DOL propose changing?
A: The proposal would make several significant changes.
New salary requirement
Under the proposal, the minimum salary requirement for the administrative, professional (including the salaried computer professional) and executive exemptions would increase from $684 per week ($35,568 annually) to $1,059 per week ($55,068 annually). *The DOL proposes to base the minimum salary on current economic data. Actual amounts may be higher based on economic data available at the time the final rule is published.
This means that to qualify for an administrative, professional and executive exemption from FLSA's overtime requirements, employees would be required to be paid a minimum weekly salary of $1,059 and continue to perform the applicable job duties. Exempt computer professional employees may also be paid hourly, if it is at least $27.63 per hour, which wouldn’t change under the proposed rule.
Employers would continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement ($105.90 per week under the proposed rule) for the administrative, professional and executive exemptions, as long as these forms of compensation are paid at least annually.
Highly compensated employee exemption
The proposal would increase the total annual compensation requirement for the "highly compensated employee" exemption to $143,988 (at least $1,059 must be paid on a weekly salary basis). * The DOL proposes to base the highly compensated employee compensation requirements on current economic data. Actual amounts may be higher based on economic data available at the time the final rule is published.
Future minimum salary increases every three years
The DOL is also proposing a mechanism to automatically update the salary and total compensation thresholds every three years.
Q: Did the DOL propose any changes to the duties tests?
A: The DOL didn’t propose any changes to the duties tests.
Q: When would this rule become effective?
A: The proposed changes won’t take effect until after the DOL publishes a final rule. Before a final rule can be published, the proposed rule is subject to a 60-day public comment period. Those interested are invited to submit written comments on the proposed rule on or before 60 days after publication of the proposed rules in the Federal Register. Since the proposed rule is now published, the comment period began on Sept. 7, 2023 and is set to end on Nov. 7, 2023.
After that 60-day period ends, the DOL will then review the comments to determine whether changes should be made before publishing a final rule. Employers would then be given a certain amount of time (e.g., 60 days) to comply with the final rule.
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Note:The process could take several months. A final rule could also be delayed or blocked due to expected legal challenges.
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Q: If this proposal becomes final, what would my options be if my exempt employees' salaries are below $1,059 per week?
A: If the rule becomes final and your exempt employees fall below the new salary threshold, you would generally have two options: (1) reclassify the employees as nonexempt and pay them overtime whenever they work more than 40 hours in a workweek; or (2) raise their salary to meet the new requirement.
Q: How would I be affected if my state has its own salary requirements for the exemptions from overtime?
A: Some states have their own rules on overtime exemption. Generally, if state law is more protective (i.e., requires a higher salary amount or has duties tests that are more difficult to satisfy), then state law must be followed. Currently, only a few states (California, New York, and Washington) have minimum salary requirements for exemption that exceed the proposed federal minimum for one or more of the exemptions. More states could join the list in the future.
Keep in mind that state rules may prohibit employers from using bonuses to satisfy part of the salary requirement. Therefore, to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Check your state law to ensure compliance.
Q: Are there any steps I should consider taking now?
A: While there is no action required at this time, here are some steps you might want to consider:
- Review current classifications. Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.
- Evaluate the potential impact on your business. This includes identifying those employees who currently earn less than $1,059 per week and are classified as exempt from overtime. If the rule becomes final and your exempt employees fall below the new salary threshold, you would have two options:
1. Reclassify the employees as nonexempt and pay them overtime whenever they work more than 40 hours in a workweek; or
2. Raise their salary to meet the new requirement.
Evaluate the potential impact on your business by comparing the costs of raising an exempt employee's salary to reclassifying the employee as nonexempt and paying them overtime when they work more than 40 hours in a workweek. If an employee's salary is well below the new proposed minimum and they rarely work overtime, it may be more cost-effective to reclassify them as nonexempt. Conversely, if an employee's salary is closer to the new proposed minimum or they frequently work overtime, you may want to consider raising their salary to maintain the exemption.
Conclusion
The proposed rule could have a significant impact on many small employers if it becomes final. Watch for developments closely.