U.S. DOL Proposes Overtime Rule to Increase Salary Threshold on White-Collar Exemptions

With the announcement by the U.S. Department of Labor (DOL) of a Notice of Proposed Rulemaking on overtime, businesses should consider preparing for what could be a major increase to the salary threshold for exemption from overtime requirements.

As published in the Federal Register on Sept. 8, 2023, the DOL has proposed raising the white-collar exemptions salary threshold to the 35^th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region (the South at the time of the rulemaking), which equates to $1,059 per week (or $55,068 a year). As a result of this increase, salaried, exempt employees making less than that amount would either need to have their salaries increased to meet the higher threshold or would become eligible for overtime pay under the Fair Labor Standards Act (FLSA) after working 40 hours in a workweek. The agency has also proposed an increase to the salary threshold for the highly compensated employee (HCE) exemption.

Again, this is only a proposed rule. The current Final Rule on Overtime remains in effect.

What Would Change Under the Proposed OT Rule?

In addition to increasing the salary threshold for the executive, administrative, and professional exemptions under FLSA, which is a significant change from its current $684 per week ($35,568/year) and could possibly extend overtime protections to an additional 3.6 million workers, according to the DOL, the proposed rule would:

• Automatically update the salary thresholds every three years to reflect current earnings data.
• Raise the threshold for the highly compensated employees exemption to $143,988. It currently is $107,432.
• Ensure workers in U.S. territories (Puerto Rico, Guam, the U.S. Virgin Islands, Northern Mariana Islands) that are subject to the federal minimum wage also have these overtime protections.

Before the rule could become final, there will be a 60-day public comment period that could be extended. Following the comment period, the agency must consider all comments and determine whether to make adjustments to the proposal before issuing a final rule. Similar to what happened in 2016, the final rule is expected to be challenged in court. The Obama administration’s final rule that was enjoined in federal district court would have raised the salary threshold to more than $900 per week.

This leaves businesses in an unenviable position of not knowing when the final rule, if at all, will impact them. However, employers should consider taking steps to prepare their business and employees for any potential changes.

Steps to Help Businesses Prepare for New OT Rule?

It might not be as simple as just increasing impacted employee salaries to maintain employee exemptions from overtime under the proposed changes, especially since that isn’t always financially prudent or possible for a small business. Plus, employee salary isn’t the only factor used in determining eligibility for overtime; job duty requirements must also be met to satisfy an exemption under Federal wage and hour law.

• Review each employee’s classification. You might decide not to adjust an employee’s salary and instead reclassify them as non-exempt, but note that changing an employee from exempt status includes other considerations on pay, which might entail calculations regarding regular rate and how to handle compensation such as bonuses.
  • With more non-exempt employees, your recordkeeping responsibilities could increase. You might need to consider new or improved technology to handle an influx of administrative tasks for employee time keeping.
• Consider unintended ways reclassification could affect your business. Overtime expenses might rise, employee morale might dip, turnover could increase, some employers might perceive themselves as having been demoted, benefits tied to compensation could change, etc.
• Revisit policies on use of company equipment and hours worked. Policies should be clear for exempt and non-exempt employees regarding use of company equipment and personal devices outside of work hours and while traveling for business.
• Provide advance notice and proper training. You should check to see whether your state or local jurisdiction has laws requiring advance notice of wage changes. Reclassified non-exempt employees should receive training on timekeeping procedures, meal and rest breaks, overtime approval policies, and more.
• Review applicable white-collar duties test. Once an employee meets the salary basis test (e.g., an exempt employee under the FLSA receives a salary — the same amount each week — regardless of the number of hours worked in a workweek) and the salary threshold, they also must meet the job duties of one or more of the exemptions under the FLSA (e.g., Executive, Administrative, Professional) to be considered an exempt employee. Learn about the white-collar exemptions.

What’s Next?

Paychex will continue to monitor developments from the Department of Labor as the proposed rule goes through the comment period and any subsequent process before a final rule is published. If your business has questions, having a conversation with an HR expert or legal counsel is recommended.