Minimum Wage and Overtime Pay
Department of Labor's Notice on Proposed Rulemaking
The U.S. Department of Labor’s Wage and Hour Division has issued a proposed notice of rulemaking (“NPRM”) to update and revise the regulations currently implementing the exemption of certain white-collar employees from minimum wage and overtime pay under section 13(a)(1) of the Fair Labor Standards Act (FLSA). Specifically, the proposal includes (1) increasing the standard salary level generally required for exemption; (2) increasing the highly compensated employee total annual compensation amount; and (3) automatically updating the earnings thresholds every three years using current wage data. Comments to the NPRM are due by November 7, 2023.
Understanding the Existing Law
The FLSA requires employers to pay employees a minimum wage, and to pay overtime of at least 1.5 times the employee’s regular rate of pay for those who work more than 40 hours. The FLSA, however, exempts from the overtime and minimum wage pay requirements employees employed in a “bona fide executive, administrative, or professional capacity” (“EAP”). This is commonly referred to as the “white collar” or EAP exemption. The Labor Department years ago developed then refined a test for determining who falls within the EAP designation. It consists of three parts:
- The employee must be paid a predetermined and fixed salary (the salary basis test);
- The amount of salary paid must meet a minimum specified amount (the salary level test). Currently, that threshold is $684 per week or $35,568 per year, meaning those earning more than that can qualify for EAP exempt status assuming the other criteria are met; and,
- The employee’s job duties must be primarily executive, administrative or professional duties as defined by the regulations (the duties test).
Also, the regulations contain a special rule exempting from overtime highly compensated employees (“HCE”). The following criteria must be met to qualify as highly compensated and thus be exempt from overtime:
- The employee must earn annual compensation of $107,432 or more, which includes at least $684 per week paid on a salary or fee basis; the rest can consist of commissions, nondiscretionary bonuses and other nondiscretionary income earned during the 52-week period;
- 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. Unlike the EAP employee who must pass the duties test, the HCE test is more a minimal duties test.
The FLSA is a complex law, and this memo simply highlights the applicable portions that the NPRM seeks to change. Other exceptions exist to the salary tests for doctors, lawyers, teachers and outside sales employees, and the definitions of executive, administrative or professional duties also create carve outs. This memo should not be read as a comprehensive review of the FLSA.
What the NPRM seeks to Change?
The NPRM is narrow in its scope of what it proposes to change, notwithstanding its length (79 pages in the Federal Register).
- Increase the salary-level threshold for the EAP salary level test from $684/week, $35,568/year to $1,059/week, $55,068/year;
- Increase the HCE annual compensation threshold for the HCE test from $107,432 to $143,988.
- Implement automatic hikes in these thresholds every three years.
- Restore the applicability of overtime requirements to workers in U.S. territories subject to the federal minimum wage.
No changes to the duties tests for the various exemptions are contemplated in the NPRM. Duties previously found to satisfy the regulatory definitions of executive, administrative or professional duties will continue to at this time.
Impact of the NPRM if Promulgated
The Labor Department anticipates that if promulgated, the new overtime thresholds will make approximately 3.6 million additional workers eligible for overtime. Obviously, this will have a significant impact on employers, and particularly small and midsized employers, as it will increase labor costs because of the increased number of workers reclassified as overtime eligible or because companies will pay higher salaries to exceed the new thresholds. Also, companies will experience transitional expenses as they implement compliance steps to ensure workers now designated with a non-exempt status are appropriately compensated and hours monitored. Companies may need to rethink employee participation in networking, conferences, trade shows or other out-of-regular-hours events.
Will the Labor Department be able to implement these changes? A strong pushback against the proposal is expected from business and trade associations during the rulemaking period. Many of the comments filed already simply ask for a 60-day extension to this deadline, which development we will continue to monitor.
Then expect litigation. In 2016, the Labor Department pushed forward a similar proposed rulemaking, only to have it struck down by a federal district court in Texas.
Any questions can be directed to Rick Van Arnam, The Vision Council’s regulatory affairs counsel, at email@example.com.