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On September 8, 2023, the U.S. Department of Labor (DOL) published a proposed rule in the Federal Register that looks to increase the minimum salary thresholds for overtime exempt employees. The proposal seeks to increase from the current statutory threshold of $684 per week to $1,059 per week for administrative, executive, and professional exemptions. This would increase annual salary minimums from $35,568 to $55,068 for those employees to be exempt from overtime pay.
Interestingly, the DOL set the measurement for determining the minimum salary threshold based on the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). To arrive at the proposed number, the DOL used data from 2022, but indicated it would use the most recent data available when it issues the final rule. This could result in an even higher minimum salary threshold for exempt employees. The DOL projects that the salary threshold could be $1,140 per week ($59,285 annually) by the fourth quarter of 2023, and $1,158 per week ($60,209 annually) by the first quarter of 2024.
In addition, the proposed rule seeks to raise the “highly compensated employee” exemption from the current threshold of $107,432 to $143,988 per year. Again, the proposed increase is based on 2022 data, and the DOL expects to issue a final rule based on more current data at the time it is issued. Note that not all states recognize the highly compensated employee exemption, so this change may not impact those states like California. Exempt employees in the motion picture industry who are paid a specified base rate and meet the duties test will have their base rate increased from $1,043 per week to $1,617 per week. The proposed rule would also automatically update the salary threshold every three years. There would also be salary thresholds in U.S. territories subject to the federal minimum wage, with some exceptions. Importantly, there are no proposed changes to any of the duties tests under the FLSA overtime exempt rule.
From here, there will be a 60-day comment period through November 7, 2023 to allow the public time to comment on the rule. There will likely be extensions of this time to accommodate the influx of comments expected. Once the comment period is closed, and after all comments are reviewed, the DOL will determine whether to make any changes to the proposed rule. A final rule will eventually be published and it will go into effect within a few weeks of publishing. Considering all of these steps, a final rule is not expected to be in place until 2024. Additionally, litigation challenging the rule will also likely be filed, potentially further complicating the timeline.
Assuming an increase does occur, employers should start preparing now. Determine which employees currently, or who will in 2024, earn between $35,568 and $55,068 per year. Track their weekly hours worked to assess the potential impact of overtime pay versus the cost of a salary increase to remain exempt. To do this, potential overtime pay should be calculated based on what the employee’s regular rate of pay would be, which is based on their total compensation, including things like nondiscretionary bonuses, commissions, and shift premiums. Employers should also have a plan for communicating with employees about any changes in pay as a result of the expected final rule. Keep in mind that some states, like California, New York, and Washington, already exceed the proposed federal minimum exempt salary. Other states may have additional overtime exempt rules to take into consideration.
Although we may not yet know what the final numbers will be, employers should take steps now in order to have a plan in place when the final rule is issued. Continue to look for updates on this emerging topic.
- Review the proposed rule here.
- Review the DOL’s FAQ on regular rate of pay here.
- Analyze potential cost of converting employees to either non-exempt or exempt based on the new proposed minimum thresholds.
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