The Wage & Hour Division of the U.S. Department of Labor (DOL) published a proposed rule on September 8 that would revise federal regulations relating to exemption from overtime pay requirements for executive, administrative, and professional (“EAP”) employees under the Fair Labor Standards Act.  Specifically, DOL is proposing to significantly increase both the standard salary level required for exemption and the highly compensated employee total annual compensation threshold, and to establish a system for automatically updating these thresholds on a regular basis going forward.

Background: Current Requirements for Overtime Exemptions

For an overtime exemption to apply, an employee’s salary and specific job duties must meet applicable requirements provided in the Department’s regulations.

To fall within the EAP exemption under the regulations currently on the books, an employee must:

• be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
• be paid at least a specified weekly salary level, which in the current regulations is $684 per week, or the equivalent of $35,568 annually for a full-year employee (the “salary level test”); and
• primarily perform executive, administrative, or professional duties, as those terms are specifically defined in the Department’s regulations (the “duties test”).

DOL regulations also contain a special rule, involving a less restrictive duties test, for highly compensated employees.  Under current regulations, a highly compensated employee (HCE) is deemed exempt if:

• the employee earns total annual compensation of $107,432 or more, which includes at least $684 per week paid on a salary or fee basis;
• the employee’s primary duty includes performing office or non-manual work; and
• the employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

This DOL Fact Sheet provides additional information about overtime exemption for highly compensated employees.

The current regulations took effect on January 1, 2020, following DOL’s issuance of a final rule in 2019.  The Department also published a final rule updating the standard salary threshold and HCE total compensation threshold in 2016, but a federal court blocked that rule from taking effect, just days before its implementation.  The last update prior to 2020 was implemented in 2004.

Current Proposal: Increases to Salary and Compensation Thresholds

The Department’s proposal would significantly increase the salary and compensation thresholds for EAP employees:

• The proposed rule would increase the current regulation’s standard salary level from $684 to $1,059 per week, or from $35,568 to $55,068 annually for a full-year worker.
• It would increase the total annual compensation requirement for highly compensated employees from $107,432 to $143,988, of which at least $1,059 per week (the proposed, updated standard salary level) would have to be paid on a salary or fee basis.

It is important for employers to note that the threshold figures could actually be higher than stated above when the rule is finalized.  This is because the way DOL arrives at the salary and compensation thresholds is by choosing a benchmark percentage of the earnings of current full-time salaried workers, based on data collected by the U.S. Bureau of Labor Statistics.  Specifically, the Department is proposing to set the salary threshold level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region in the U.S. (currently the South region), and to set the HCE compensation threshold at the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally.

In developing this proposed rule, DOL relied on Bureau of Labor Statistics data for calendar year 2022.  In a footnote, however, the Department states that a final rule would use the most recent data available, which would change the dollar figures.  For example, if after consideration of comments received, DOL was to issue a final rule in 2024 that adopted the proposed salary level of the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region (South), the Department expects that the salary threshold could be $1,140 per week or $59,285 for a full-year worker, based on what the data are projected to show for the fourth quarter of 2023.

Notably, DOL is not proposing any changes to the standard duties test in the current proposed rule.  At this time, the Department says that it favors keeping the current test, which is well known to employers and employees.

Also Proposed: Automatic Updates in the Future

DOL is also proposing a regulatory provision to update the applicable thresholds automatically going forward, without conducting a notice and comment rulemaking process like the one currently underway.

A salary level that is not kept up to date can become obsolete as wages for nonexempt workers increase over time, and the Department believes that automatically updating the salary level and HCE total annual compensation requirement is the best way for it to timely and efficiently address this issue.

Specifically, under this provision the Department would apply the “percentile” methodology described above to calculate updates to the standard salary level and the annual compensation requirement for highly compensated employees every three years.  It would do so using the most recent four quarters of data available at the time of the calculation, as published by the Bureau of Labor Statistics.  Then, at least 150 days before the effective date of the update, the Department would publish a notice with the new earnings levels required for exemption.

Noting concerns about the need to preserve flexibility to adapt to unanticipated circumstances when setting a salary level, DOL also proposes to reserve the ability to temporarily delay a scheduled automatic update where unforeseen economic or other conditions warrant, but it is not clear when the Department might choose to exercise this authority.

Estimated Impact of the Proposed Rule: Broad and Significant

If the rule is finalized as proposed, the Department estimates that, in Year One of implementation, 3.4 million workers who meet the standard duties test and earn at least $684 per week but less than $1,059 per week would either become eligible for overtime or have their salary increased to at least $1,059 per week.  Of that total, DOL estimates that approximately 600,000 employees working in the healthcare and social services sector would be affected.  The Department also estimates that approximately 250,000 employees who are currently exempt under the HCE test would be affected by the proposed increase in the HCE total annual compensation level during the first year.

In Year 10, with automatic updating, the Department estimates that 4.3 million workers would be affected by the proposed change in the standard salary level test and 768,700 workers would be affected by the proposed change in the HCE total annual compensation test.

Interplay with State Requirements

The federal Fair Labor Standards Act provides minimum standards and does not preempt a state from establishing more stringent standards. If a state establishes a more protective standard than the provisions of the FLSA, that higher standard applies. This would include, for example, exemption criteria for EAP employees under state law with higher earnings thresholds than those provided in the Department’s federal regulations.

Next Steps

The proposed rule is open for public comment through November 7, and LeadingAge will work with members in the coming weeks to analyze the impact of the proposals and develop comments for submission to the Department.

DOL is proposing that all aspects of the rule would become effective 60 days after finalization.  It is very difficult to predict the timing, but some observers believe it is unlikely DOL would issue a final rule earlier than the first quarter of 2024, given the issues involved and the high volume of comments expected to be submitted.

The Department recognizes that the 60-day proposed effective date is shorter than the effective dates established in prior rules, which were between approximately 90 and 180 days, but it believes a 60-day effective date is appropriate because changed economic circumstances have caused a strong need to update the standard salary level.  The agency is asking the public for comments on the effective date, along with all other aspects of the proposal.

If finalized as proposed, the rule is likely to face legal challenges, but the outcome of any such litigation is very uncertain, and many employment law practitioners are advising employers to begin an analysis, sooner than later, of what the proposed rule would mean for their organizations.

This DOL webpage includes a link to the proposed rule, a press statement that reflects the Department’s intention and goals for the rule, as well as this Frequently Asked Questions document.

LeadingAge will closely follow developments relating to this proposal and provide updates for members as the rulemaking process moves forward.