USDOL Proposes Rules Increasing Salary Level Threshold for Exempt Employees

STEVEN G. MEILLEUR, Ph.D., SPHR
Senior Vice-President & Risk Services Consultant
Human Resources & Employment Practices
Poms & Associates Risk Services

On August 30, 2023, the U.S. Department of Labor (DOL) issued its long-anticipated proposal to raise the salary threshold for exempt employees. This change could make more of your employees eligible for overtime premiums. This proposed rule would substantially alter the requirements for “white collar” exemptions under the federal Fair Labor Standards Act (FLSA). The proposed rule deals primarily with the Executive, Administrative and Professional (EAP) exemptions as well as the exemption for Highly Compensated Employees (HCEs).

Background:

If the DOL’s proposed rule becomes law, many salaried employees who were historically exempt from overtime pay would be entitled to one-and-one-half times their regular rate of pay for hours worked in excess of 40 in a workweek.

Under the FLSA’s overtime pay regulations, employees are entitled to earn one-and-one-half times their regular rate of pay for hours worked in excess of 40 in a workweek. However, the FLSA contains overtime pay exemptions for executive, administrative, professional, outside sales, computer employees, and other specialized exemptions. Currently, to qualify for the white-collar exemption, each of the following three (3) tests must be met:

The salary-basis test: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed;
The salary-level test: The amount of salary paid must meet a minimum specified amount (currently $684 per week, or $36,568 per year) and;
The duties-test: The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

**Changes Under the DOL’s Proposed Rule: **

The USDOL’s proposed rule will only affect the salary-level test:

The salary threshold for employees to qualify for the white-collar exemptions under the Fair Labor Standards Act (the “FLSA”) would increase from $684 per week to $1,059, meaning employees would need to earn $55,068 or more per year to be exempt from OT pay.
The salary threshold for the FLSA’s highly compensated employee exemption also would increase from $107,432 to $143,988.
The proposed rule would continue the use of non-discretionary bonuses and incentive payments to satisfy up to ten percent of the standard and special salary thresholds under certain circumstances.
The salary thresholds for these FLSA exemptions would increase automatically every three years under the new proposal so they keep pace with changes in worker salaries, ensuring that employers could adapt more easily because they would know when salary updates would happen and how they would be calculated.
The new salary levels also will apply to workers in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands. They will not be extended to American Samoa, which would keep a special salary level. Increases to the salary threshold have not been extended to U.S. territories since 2004.
The proposed rule would also increase the special salary level for the motion picture industry.

The DOL is not proposing any changes to the salary-basis test or the standard duties test requirements for the white-collar exemptions in this rulemaking.

Next Steps:

Although it’s just a proposal at this point, we expect the DOL to prioritize this rule and move swiftly through the notice and comment period. In the meantime, you should start preparing for what could be significant changes to your compensation plans.

It is unclear at this time when the proposed rule might take effect. Once published in the Federal Register, the proposal would be open for public comment for 60 days before it could be published as a final rule. Undoubtedly, the proposal will be met with significant resistance and challenges from groups representing employers’ interests. The proposed rule will be open for public comment for 60 days (until October 29, 2023).

What This Means to You:

Employers should begin to chart a course to comply with the proposed rule, which will likely take effect in 2024. To do so, we recommend that employers take the following actions:

Review current employees’ compensation to determine whether any exempt employees will fall into the band of compensation between the current and the proposed thresholds.
Use this time to review the duties of all exempt employees, particularly those whose compensation will be at the bottom of the proposed exempt salary range, to confirm whether they are properly exempt.
Carefully strategize the conversion of any exempt employees who have fallen below the threshold to non-exempt and consider tracking time and limiting work away from the office to minimize the financial impact of overtime.

Employers that currently have exempt workers who earn more than $684 per week but less than $1,059 per week yet satisfy the duties requirements can comply with the proposed rule by increasing the employee’s salary to the proposed level or reclassifying employees as non-exempt. Regardless of what the final rule may include, such rule changes are a good time for employers to review the exempt classification of their employees.

If you decide to reclassify your employees to non-exempt status, there are many considerations you’ll have to work through, including the following:

How Much to Pay. Will you divide the employee’s weekly salary by 40 hours to determine their hourly rate, or will you factor in the employee’s estimated overtime and adjust accordingly?
Regular Rate Calculations. Overtime premiums are based on the employee’s “regular rate of pay.” Employers are sometimes surprised to learn the regular rate is not simply an employee’s hourly rate of pay or their take-home pay. The regular rate is based on “all remuneration” earned from employment, with the exception of eight specific exclusions contained in section 7(e) of the FLSA.
Incentive and Bonus Pay. The regular rate includes all types of compensation, including non-discretionary bonuses, commissions, payments for undesirable shifts or duties, and some non-cash payments, depending on the circumstances. Keep in mind that most bonuses are not discretionary and must be included in the regular rate. It is common for employers to pay out bonuses based on a formula announced ahead of time and designed to incentivize certain behaviors. Such bonuses are not discretionary. You can read more about the regular rate here.
How to Track Those Employees’ Work Time. Employers are required to make and keep records of non-exempt employees’ working time. Before converting employees to non-exempt status, it may require some planning, reconfiguration of workflow, and implementation of new processes or technology to ensure that you are accurately recording their work time. It is best practice to think about these questions in advance and explore multiple potential recordkeeping processes to determine which options meet your needs and are cost-effective.
How Benefits Will Be Affected: Do you have different vacation, sick leave, and other policies for exempt and non-exempt employees? You will have to consider how to transition reclassified employees to new programs and train workers and their supervisors on new procedures.

Look at Exemption Laws in the States Where You Have Employees - Employers also must consider how the proposed rule interacts with the corresponding exemptions under the myriad of state laws. Some states do not have overtime laws; others incorporate the FLSA as it stands; others incorporate the FLSA’s overtime provisions with higher salary requirements; and others have their own exemptions and salary levels without reference to the FLSA.

While the FLSA regulates little in the way of actual wage payments, deductions, and notification of pay terms, many states have detailed requirements and might even have different provisions for non-exempt versus exempt employees. So, many states have their own salary and duties tests for determining whether an employee is exempt from overtime under state rules. In many cases, the state criteria are harder to meet than the federal criteria. Six states, for example, increased the minimum salary requirement for overtime exemption on January 1, 2023 (Alaska, Colorado, California, Maine, New York, and Washington), so be sure to check the states in which you have employees located to ensure you are not just following FLSA rules, but state rules concerning exemptions.

Consider the Impact on Employee Morale - For many employers, it may not be possible to simply raise every affected employee’s salary to the new threshold. However, reclassifying employees as non-exempt could have a negative impact on morale.

Many employees associate prestige with being classified as an exempt-salaried employee, especially since the white-collar exemptions require a certain level of supervisory responsibility or discretion and independent judgment. Often, exempt employees like the flexibility that comes with being salaried, and they don’t want to track and record their hours worked. Managers who will now have to clock in and out with their direct reports may be particularly sensitive to this change.

Therefore, even if their pay remains the same, employees may view a switch to non-exempt status as a demotion. So, you will need to weigh the impact on morale when making the decision to convert employees. Proactively communicate and be prepared to answer questions about why you decided on this route rather than increasing pay. It may be helpful to review and summarize market studies on salary data so you have facts to back up your decision.

Remind employees that they are valued and let them know you are required to make changes in light of the federal government’s new wage and hour rules. The DOL has made clear that the goal is to make more people eligible for overtime pay — which means more workers will likely need to be converted to non-exempt — and you can explain to employees that your decisions are meant to keep your business compliant with the latest regulations.

Plan to Provide Advance Notice of Changes - In addition to developing communications focused on employee relations and morale, you’ll want to provide a written communication to each employee about the specific changes to their compensation and what new responsibilities come with the changes, such as timekeeping, meal and rest breaks, and other requirements.

Note that some states require advance notice of wage changes, so you should check your local requirements. Regardless of the state law, however, you should clearly communicate the new terms of employment before they take effect.

Review Your Policies on Company Equipment and Personal Devices - Do you have different policies for exempt and non-exempt employees when it comes to issuing company equipment and using personal devices? Exempt employees may have more leeway to use company laptops or their own personal devices – such as smartphones – to conduct business while traveling or outside of their regular office hours. Perhaps you limit such use for non-exempt employees so they aren’t tempted to perform off-the-clock work. In that case, you’ll need to apply your policies consistently and advise reclassified employees about their new responsibilities.

Regardless of whether you allow non-exempt employees to work remotely or use portable devices, be sure your policies are clear about acceptable work hours, proper timekeeping procedures, and capturing all hours worked.

Develop a Training Plan for Managers and Newly Non-Exempt Employees - We highly recommend you provide detailed training to newly reclassified employees and their managers prior to the changes taking effect. There’s a lot to learn. The specifics may vary from business to business, but here are a few examples of what you’ll want to cover:

Scheduled hours.
Overtime approval policies.
Timekeeping procedures.
Recordkeeping requirements.
Rules about meal and rest breaks.
Policies on using personal devices for work; and
Prohibition on off-the-clock work.

Ensure Exempt Employees Meet the Duties Test - As with all exemptions, neither the job title nor the job description alone determines whether an employee qualifies for a white-collar (or any other) exemption. Instead, to be eligible for an exemption, the employee’s primary job duties must meet both state and federal wage and hour law requirements.

You should note that the duties test varies depending on the exemption. Here is a summary of the basic requirements under federal law for the white-collar exemptions. Of course, the salary basis test must be met before any of these exemptions can be relied upon.

Poms & Associates Risk Services can assist your organization in many areas related to human resources, employee benefits, employment, health & safety, organizational development, and more. Your HR Team is also available to provide answers to day-to-day questions with regard to compliance with various regulations. In addition, we can assist organizations with training, document preparation, and compliance assessments on a per-project basis. For more information, please email us.

For a convenient and comprehensive Checklist that will help you navigate these new rules click HERE.

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