[CAPLAW News] DOL Proposing to Increase Salary Level for FLSA Overtime Exemption

DOL Proposing to Increase Salary Level for FLSA Overtime Exemption

September 8, 2023

CAAs may soon need to consider the exempt status of their employees should recently proposed regulatory updates by the U.S. Department of Labor (DOL) go into effect. On September 8, 2023, DOL published a Notice of Proposed Rulemaking on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees (the “Proposed Rule”). Key changes included in the Proposed Rule raise the salary level of certain employees exempted from federal overtime pay requirements, from $684/week to $1,059/week, and provide for automatic updates to the salary level every 3 years. The Proposed Rule is the first step in the federal rulemaking process, so it is not in effect yet. However, should DOL finalize it as is, the agency estimates an additional 3.6 million workers would become eligible for overtime pay.

EAP Exemption and Proposed Updates

EAP Exemption Overview

In general, the Fair Labor Standards Act (FLSA) requires that employees be paid at least 1.5 times their regular rate of pay for each hour worked over 40 in a workweek. However, an exemption from this rule exists for certain executive, administrative, and professional employees (the “EAP exemption”), provided they satisfy the following three-part test:

The employee is paid a predetermined and fixed salary regardless of the amount or quality of work performed (the “salary basis test”);
The salary meets a minimum amount or threshold (the “salary level test”); and
The employee’s job duties primarily involve executive, administrative, or professional duties as defined under the FLSA (the “duties test”).

If an employee meets this three-part test, they are considered “exempt,” and their employer does not need to provide overtime pay to them. An existing CAPLAW FAQ on the EAP exemption and FLSA principles provides additional information on how each part of the test works for CAAs (including how Head Start teachers may be exempt under one of the exemptions that does not require a minimum salary level; the Proposed Rule does not include relevant revisions related to those limited exemptions).

Proposed Updates

Increase Salary Level. In the Proposed Rule, DOL increases the minimum salary threshold needed to satisfy the salary level test. Specifically, it raises the threshold from the current level of $684/week ($35,568/year) to $1,059/week ($55,068/year). If the Proposed Rule takes effect, those employees who are currently exempt and earning less than $1,059/week would no longer satisfy the EAP exemption test and would be eligible for overtime pay. DOL set the proposed threshold at the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region (currently the South).

Increase HCE Compensation Level. The Proposed Rule increases the compensation threshold for “highly compensated employees” (HCEs). This exemption differs from the EAP exemption discussed above. An HCE must primarily perform office or non-manual work, satisfy a more lenient duties test, and earn at least the minimum HCE compensation threshold, which includes commissions, nondiscretionary bonuses, and other nondiscretionary compensation. The Proposed Rule would increase that compensation threshold from its current level of $107,432/year to $143,988/year. This proposed threshold reflects the annualized weekly earnings of the 85th percentile of full-time non-hourly workers nationally.

Automatically Adjust Salary and Compensation Levels. The Proposed Rule implements automatic adjustments to the EAP exemption and HCE salary and compensation thresholds. DOL will adjust these levels every 3 years to bring them in line with the updated 35th and 85th percentile standards referenced above. This differs from the current rule, which requires DOL to engage in rulemaking before increasing the EAP exemption and HCE salary and compensation levels.

Extend New Salary Levels to U.S. Territories. The Proposed Rule extends the new EAP salary level to the U.S. Territories of Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI. The salary level in these U.S. Territories was the same as in U.S. states from 2004 to 2019, but the DOL chose not to apply increases implemented in 2019 to them. The Proposed Rule increases the salary level in the U.S. Territory of American Samoa from the current threshold (set in 2004) of $380/week to $890/week. DOL set this threshold lower than the other U.S. Territories because a lower minimum wage requirement applies in American Samoa.

Recent History Around the Rule

The Proposed Rule is DOL’s latest attempt to update overtime pay-related requirements, including the EAP salary level. In 2016, the Obama administration published a Final Rule that increased the threshold from $455/week to $913/week and required automatic updates to it every 3 years. That rule was challenged in court and blocked, and eventually struck down on the basis that DOL had exceeded its authority to implement such a large salary level increase.

In 2019, the Trump administration published a Final Rule that contained a more moderate increase in the salary threshold from $455/week to its current level of $684/week, but did not provide for automatic adjustments.

Potential Impacts

CAPLAW has issued guidance in the past to help CAAs weigh the potential impacts of similar salary level increases on overtime requirements and exemptions. This resource discusses impacts such as paying overtime to more employees, reclassification of workers, budgetary issues, employee time tracking, and more. Because the impacts would be similar under this Proposed Rule, CAAs should consider revisiting this existing guidance if they’d like to submit comments and anticipate operational changes should the Proposed Rule go into effect. Other potential impacts to consider that are specific to this Proposed Rule include:

Automatic increases to the salary level test threshold every 3 years which may require CAAs to reassess employees and their classification as exempt and non-exempt more regularly.
Revised salary levels in U.S. Territories which will likely require CAAs that operate in those areas to assess employees and their classification as exempt and non-exempt.

Next Steps

At this time, it is uncertain whether the Proposed Rule will be finalized in its current form, or whether DOL will make changes prior to publishing a final rule. Recent history suggests that a final rule could face legal challenges that delay or ultimately block implementation. CAPLAW will continue to provide updates related to the Proposed Rule and other legal developments.

In the meantime, DOL is soliciting comments on the Proposed Rule, which may be submitted by mail or electronically at https://www.regulations.gov. Comments must be received on or before November 7, 2023.

Additional Resources