The Overtime Rules are Changing – Are you Ready?

Last year, the United States Department of Labor (“DOL”) announced a notice of proposed rulemaking (“NPRM”) designed 1) to increase the salary level required for employees paid on a salary basis under white-collar overtime exemptions under the Fair Labor Standards Act (“FLSA”); 2) to update the salary level automatically every three years; and 3) to increase the compensation requirement for a hybrid, highly-compensated-employee exemption. If the proposed rule is finalized as-is, it would require employers to consider serious adjustments for affected employees.

Specifically, the proposed rule would increase the annual salary level for executive, administrative, and professional employees to $55,068 annually; automatically update the salary level every three years to reflect changes in earnings data; and increase the highly compensated employee requirement from $107,432 to $143,988. The executive, administrative, and professional exemptions, commonly referred to as the “white-collar exemptions,” exempt employees from federal minimum wage and overtime requirements, provided that the employee meets the applicable duties test and is compensated on a salary basis at a level above $684 per week (or $35,568 annually).

The DOL accepted comments on the NPRM for a 60-day period through November 7, 2023, during which time it received over 26,000 comments. According to the DOL’s timetable, it anticipates issuing the final rule in April 2024.

  1. Employers will need to evaluate employees below the proposed salary level.

If an exempt employee is currently paid on a salary basis below the proposed $55,068 level, employers should consider changes to address the proposed increase. Failure to adjust the salary level could cause the loss of the exemption and require payment of overtime premium rates for hours worked over 40 hours in a workweek.

The change could have substantial effects. For example, an employer paying a $54,000 salary to a “white-collar” exempt employee would lose the exemption and be required to pay premium rates for overtime hours. If the employee worked 52 hours per week, then, under the proposed rule, the employer would be required to pay overtime premium pay for the 12 overtime hours. Over a year, under the proposed rule, if the employer does not adjust the salary to comply with the new level and otherwise satisfy exemption requirements, the employer would have to pay approximately $6,000 in additional overtime premium pay.

If the proposed rule becomes effective, employers may consider several compliance alternatives, including increasing exempt employees’ salaries above the new level to maintain the exemption, reducing hours worked to 40 or less in a workweek to avoid triggering overtime pay requirements, and giving up the exemption and paying overtime premium rates.

  1. Employers will need to check compliance with required salary levels every three years.

The proposed rule change would require employers to undertake salary-level compliance checks every three years, dwarfing the frequency with which employees have had to review prior DOL salary level updates. Before the most recent salary-level update occurred in 2020, the last update occurred in 2004, 16 years prior. Employers accustomed to waiting passively for the DOL to announce salary-level increases along with lead times to permit preparation for compliance will have to adopt more active measures, including scheduled, internal compliance reviews every three years.

  1. Employers should review salary levels of employees exempt under the highly-compensated-employee exemption to ensure continued exemption.

The DOL’s proposed rule would also affect employers with employees exempt under a hybrid, white-collar exemption known as the “highly-compensated-employee exemption.” Current DOL regulations permit employers to classify highly-compensated employees as exempt even though they do not satisfy all elements of the primary-duty tests associated with any of the white-collar exemptions. In these cases, employers are essentially permitted to classify highly-paid employees as exempt by “cherry-picking” one of the primary duties from any of the executive, administrative, or professional exemptions. To qualify under the hybrid exemption under the current DOL rule, the employee also must be paid annual compensation that exceeds the level stated in the DOL rule, i.e., currently $107,432 per year.

The DOL’s proposed rule would increase the compensation requirement under the highly-compensated-employee exemption from $107,432 to $143,988. Employers with employees who are classified under the hybrid exemption and who are paid less than $143,988 per year will need to consider options if the proposed rule becomes effective and if the employer wants to continue to classify the employees as exempt. Alternatives may include raising compensation above the new level or modifying job duties to permit classification under the executive, administrative, or professional exemptions, as opposed to the hybrid, highly-compensated-employee exemption.

Praemia Law Breakfast Briefing

On April 10, 2024, Praemia Law, PLLC will host a breakfast briefing, “Overtime Rules Are About to Change – Are You Ready?” Praemia attorneys will discuss the DOL’s proposed overtime changes along with other wage-and-hour topics. Space is limited. Reserve your spot here.