DOL Proposal Will Expand Overtime to 3.6 Million Workers
What’s the Background?. Under the Fair Labor Standard Act (“FLSA”), employees who work beyond 40 hours a workweek are required to be paid an overtime premium of one-and-a-half times their regular rate of pay, for all hours worked in excess of 40. However, workers may be “exempt” from eligibility for overtime pay, if they fall under certain categories, including the “white collar” Administrative, Executive, or Professional (“EAP”) exemptions. In order to qualify for one of these EAP exemptions, an employee must: (1) be paid on a salary basis; (2) be paid at least the designated minimum weekly salary; and (3) perform certain duties that require discretion and judgment.
What’s the Big News? On August 30th, the Department of Labor (“DOL”) issued a Notice of Proposed Rulemaking (“NPRM”) that would increase the designated minimum weekly salary for exemption, and restore the applicability of the overtime requirements to workers in the U.S. territories subject to the federal minimum wage, thereby increasing the number of employees who will be eligible to receive overtime. This NPRM, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees”, proposes to expand time-and-a-half pay protections to more workers by changing the exemptions to overtime eligibility for EAP employees under the FLSA.
Specifically, the NPRM attempts to revise the salary level regulations issued under Section 13(a)(1) of the FLSA. The proposed rule would raise the FLSA’s annual salary level threshold:
· From $35,568 to $55,068 for EAP exemptions to overtime requirements; and
· From $107,432 to $143,988 for EAP exemptions to overtime requirements for “highly compensated employees” (“HCE”).
Under the NPRM, those workers who are currently classified as “exempt” from overtime and are paid less than $55,068 would be automatically eligible for overtime (and disqualified from being classified as “exempt”). The proposal would also automatically update the salary threshold every three years (a footnote suggests that the threshold could be $60,209 per year in 2024). The NPRM also means that current employees classified as exempt under the HCE exemption must make up to $37,000 more per year in order to retain that designation.
The DOL did not propose any change to either the “duties” test or the “salary basis” test. The NPRM is applicable in all U.S. territories that are subject to Federal minimum wage. The DOL anticipates that this change would impact 3.4 million exempt employees and would result in a $1.2 billion cost to employers (referred to by the DOL as “income transfer” from employers to employees).[1]
The NPRM is not yet law; it will be subject to a comment period during which interested parties can review and provide reactions to the suggested changes. Once the comment period closes, the DOL will determine whether or not to adjust the proposed rule before it becomes law. Employers are encouraged to participate in the comment process.
The NPRM will undoubtedly face numerous legal challenges, including regarding the DOL’s statutory authority and its regulatory authority. The process will be long and arduous.
How to Prepare? The NPRM, if implemented, would have a significant impact on employers who currently classify as “exempt” those workers making more than $35,000 but less than $55,000 (or $60,209) per year, or employees classified as “highly compensated” but earning less than $143,988 per year. Why? Because when exempt employees are converted to nonexempt employees, overtime costs and compliance risks increase exponentially.
In addition, workers who view being an “exempt” employee as an indicator of value or professional status may view re-classification to non-exempt positions as a demotion, and the transition will require education and communication. Employers should anticipate employee questions, concerns and assumptions - and foster clear and direct communications with affected employees and their managers.
Employers should start now to proactively evaluate and anticipate the impact this NPRM will have on their businesses. Interdisciplinary teams should be created, to examine current exempt roles where EAP incumbents are paid less than $60,000 per year (or HCEs paid less than $143,988 per year), and those teams should evaluate the need for reclassification, promotion or changes to those position designations. Consider whether to involve in-house or outside counsel and preserve the attorney client privilege. Training should be developed for newly reclassified employees and their managers. Timekeeping processes should be audited and updated Company policies should be carefully reviewed, and a comprehensive communication plan for employees should include a staged series of notices about changes to compensation and job responsibilities.
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[1] Many states also have their own overtime laws, with state-specific exemptions that are defined more narrowly than the FLSA. Under these state laws salary levels may be higher, duties tests may be different, and certain FLSA exemptions (such as the one applicable to highly compensation employees) may not be recognized. Therefore, all wage hour analyses should always include a review of both Federal and State law requirements.
