The United States Department of Labor (US DOL) announced yesterday, August 30, 2023, that it will be issuing a proposed rule that would increase the salary level required for employees to be exempt from overtime pay under the federal Fair Labor Standards Act (FLSA). According to the US DOL, the proposed rule would extend overtime protections to approximately 3.6 million more workers.

The general rule is that employees are entitled to overtime pay at the rate of 1.5 times their regular rate of pay for any hours worked in excess of 40 in a workweek. Some employees can be exempt from receiving overtime pay if certain requirements are met. The most common exemptions are the executive, administrative and professional exemptions, which often are referred to as the “white collar exemptions.”

To be exempt under the white-collar exemptions, an employee generally must:

  • be paid a fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (known as the “salary basis test”);
  • be paid at least a specified weekly salary level (currently $684 per week), although certain employees, such as doctors, teachers, and lawyers, are not subject to this requirement (known as the “salary level test”); and
  • primarily perform certain executive, administrative, or professional duties (known as the “duties test”).

There also is a relaxed exemption standard under the FLSA for certain “highly compensated” employees who are paid total annual compensation of at least $107,432. 

The US DOL proposed rule seeks to modify the salary level test as follows:

  • Increase the minimum standard salary level for an employee to be exempt from $684 per week ($35,568 per year) to $1,059 per week ($55,068 per year). This would increase the salary level to the 35th percentile of weekly earnings of full-time salary workers in the lowest-wage Census Region (currently the South);
  • Increase the total annual compensation requirement for highly compensated employees from $107,432 per year to $143,988 per year. This would increase the salary level to the 85th percentile of full-time salaried workers nationally;
  • Automatically update the salary thresholds every three years so they keep pace with proposed 35th and 85th percentile salary levels; and 
  • Apply the salary levels to employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands, and increase the special salary levels for American Samoa and the motion picture industry.

The US DOL stated that it is not proposing any changes to the salary basis or duties tests.

Although this is a proposed rule at this time, employers should determine whether it has classified as exempt any employees who earn less than $1,059 per week. If the rule is finalized, employers will then need to decide whether to increase the employee’s salary level to meet the threshold or convert the employee to non-exempt status and, in doing so, determine the hourly rate. These decisions can impact an employer’s overall compensation structure and could result in morale issues if employees perceive their conversion to non-exempt status as a demotion.

Our Labor & Employment team will continue to monitor this development and is available to answer your questions.

For further information, please contact:
Nick Zaino