A major expansion in the number of people working in the United States who employers are legally obligated to pay overtime wages will expand greatly under a Notice of Proposed Rulemaking (NPRM) announced by the Department of Labor (DOL).
At this time, employees who earn $684 per week (or at least $35,568 per year) meet the salary threshold to be classified as exempt from overtime under the federal White Collar exemptions from federal overtime law. The NPRM proposes to increase the salary floor for the White Collar exemptions to $1,059 per week (or $55,068 per year).
At present, federal overtime rules provide overtime payment exemptions to executive, administrative and professional staff members or under the Highly Compensated Employee (HCE) exemption. This only applies if the worker performs certain defined duties for the employer and the worker is paid a salary that exceeds a minimum set under DOL rules.
DOL’s estimates are that this change would make approximately 3.6 million additional U.S. workers eligible for overtime pay.
Although hailed by labor, the proposed rule did not meet with universal acclaim. Marc Freedman, vice president of workplace policy for the U.S. Chamber of Commerce, called it “the wrong rulemaking at the wrong time. It represents a more than 50% spike in the salary threshold and will increase costs for small businesses, nonprofits and other employers at a time when businesses already face persistent workforce shortages that are hindering the economy.”
The National Retail Federation has estimated that the proposed overtime changes would cost restaurants and retailers between $5 billion and $9 billion per year. “The proposed number is significantly higher than the rate of inflation,” observed David French, NRF’s senior vice president of government relations.
The rule proposes creating a mechanism that would automatically update the salary threshold for the White Collar exemptions and the HCE exemption every three years. In the immediate term, when the rule becomes final, the salary threshold for highly compensated employees would be increased from the current $107,432 per year to $143,988, tied to the 85th percentile of salaried workers nationally. Following that, the salary threshold would be updated every three years to reflect the then-current earnings data.
It is unclear at this point whether Congress will step in regarding this portion of the new rule proposal, which until now has required legislative action to enact legislation to increase the amounts. It also is unclear whether it will survive potential court challenges claiming the DOL is exceeding its authority by superseding Congress.
“The proposed regulation also includes an automatic escalator clause that lacks statutory authorization and guarantees the salary threshold will become unworkable in just a few short years,” asserts the Chamber’s Freedman. The NRF’s French agreed. “The attempt to tie the hands of future administrations through automatic increases exceeds the department’s authority.”
Who Will Be Covered
Employers should be relieved that the DOL has not sought to further specify the kinds of job responsibilities that can push an employee out of an exempt classification. There are no changes suggested in regard to the job duties test requirements under each exemption category, which already outline what duties are to be considered administrative and supervisory.
To qualify for the Executive Employee Exemption, the employee’s primary duty must be defined as managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; directing the work of at least two or more full-time employees; and possessing the authority to hire or fire other employees, explain attorneys Brodie Erwin and Sarah Spangenburg of the Kilpatrick Townsend & Stockton law firm.
The Administrative Employee Exemption requires that the employee’s primary duty be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and include exercising discretion and independent judgment with respect to matters of significance.
To qualify for the Professional Employee Exemption, the employee must perform work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes the consistent exercise of discretion and judgment. This advanced knowledge must be in a field of science or learning, and it must be customarily acquired by a prolonged course of specialized intellectual instruction.
The proposed rule would return to previous practice and ensure that workers in U.S. Territories subject to the federal minimum wage have the same overtime protections as U.S. workers. From 2004 until 2019, the DOL’s regulations ensured that for U.S. territories where the federal minimum wage was applicable, so too was the overtime salary threshold. That includes Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands.
The NPRM also includes changes to the base rate paid to employees in the motion picture production industry.
“Employers will want to look at their workforce classifications and the current salary levels to determine what changes, if any, are needed in response to this proposed increase,” attorneys for the Eversheds Sutherland law firm urge. For example, if employees are reclassified, employers will need to consider any impact on compensation, given that they may turn out to be eligible for overtime in the future.
In addition, employers may wish to revisit how their hourly rates are determined, and the impact created by bonuses and benefits (to the extent that exempt and non-exempt employees receive differing benefits), the attorneys warn.
Erwin and Spangenburg also suggest that employers check to see if their timekeeping systems are up-to-date and accurate, and look at whether they want to increase employee salaries to meet an increased threshold. Another recommendation is that employers also consider engaging in a Fair Labor Standards Act (FLSA) exemption audit to prepare for the new rule.
Other questions employers should ask themselves, the attorneys suggest, are: Will employee morale be impacted by a change in classification, how will you communicate these new rules to your employees, and do you need to train your employees and managers in light of the new rule?
In addition, they emphasize that employers need to keep in mind that if there will be future changes to compensation, they must take adequate time now to consider any notice requirements those changes could trigger under state law.