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Preparing for Proposed DOL Rule Regarding Wage Level for Overtime

Overview

The Department of Labor (DOL) has issued its proposal to increase the salary threshold for exempt employees by significantly raising the exempt salary threshold from $684 per week to $1,059 (or $55,068 or more per year) to be exempt from overtime pay. It is expected that even though this is only a proposal, the DOL will prioritize this rule and move swiftly through the notice and comment period with the expectation that this would be effective in 2024.

If the past is any indication of what might occur now, we should not be surprised to see lawsuits filed to block the rule, as this took place in 2016 when the Obama administration attempted to raise the salary level to over $900 per week. A federal court judge in Texas blocked the rule from taking effect and the DOL stopped pursuing the rule at that time due to a change in presidential administration.

Rather than plan on a delay, we suggest employers begin their analysis as if the proposal will take effect at some point in 2024.

The New Rule

Simply stated—the law is not changing nor are new requirements being introduced. Rather, the proposed ruling increases the minimum salary that an employee must be paid, to even be eligible for the administrative, executive, or professional exemptions (white-collar exemptions). To qualify for these exemptions, employees must meet three criteria:

  • Compensated on a salary basis; and
  • Be paid the designated minimum weekly salary; and
  • Perform certain duties.

Presently, the salary threshold for exempt employees is $684 a week ($35,568 annualized). The DOL’s new proposal, if finalized in its current form, would raise the rate to $1,059 a week ($55,068 annualized). In addition to the new salary threshold, the proposed rule would make the following changes:

  • Automatically update the salary threshold every three years; and
  • Increase the threshold for the highly compensated employee exemption to $143,988 (from the current threshold of $107,432).
Employer Planning Process

We suggest the following course of action, to evaluate the potential impact of the new proposal.

  • Compliance with current laws – As a starting point, review current positions for compliance. Employers should not simply rely upon job titles and job descriptions for this purpose. Employees’ primary job duties must meet both state and federal wage and hour law requirements, for exemption purposes. The exact duties test varies depending on the exemption. Often, employers conclude that if the salary basis test is met, then the other exemptions must be a formality. However, the salary threshold is only the starting point to determine if the exemptions can be relied upon (see Exhibit I below).

Other jurisdictions may have different wage and hour requirements. For example, some states have a higher salary threshold for white-collar exemptions than the FLSA’s $684 per week. Others might have different exemptions or exceptions and they might have higher minimum wage rates and/or additional overtime-type requirements. Many states also have specific notice requirements and may even have different provisions for non-exempt versus exempt employees.

  • How can you best prepare for the pending changes?
    • Start by creating a list of your exempt employees who currently earn between $35,568 and $55,068 a year. When the rule is finalized, you will have to decide whether to raise their salary to meet the new threshold or convert them to non-exempt status. Additionally, you may want to start tracking their actual hours worked now to help you understand the potential impact of converting to non-exempt status and to make an informed decision when the time comes. Now would also be a good time to perform market benchmarking to determine the overall competitiveness of a fair cross-section of positions. Simply increasing compensation may cause issues with other similar positions or those in the next level up. As such, internal and external pay equity issues may be inadvertently triggered.
  • Unintended consequences
    • For many employers, it may not be possible to simply raise every affected employee’s salary to the new threshold. However, if a move is made to reclassify employees to non-exempt this could have a negative impact on morale. Employees may associate prestige with being classified as an exempt-salaried employee, as the white-collar exemptions require a certain level of supervisory responsibility or discretion and independent judgment. Of potentially more importance, exempt employees like the flexibility that comes with being salaried, and they do not 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. The above noted impact on benefits, including working at various times of the day, may also be viewed negatively.

If you decide to reclassify your employees to non-exempt status, there are many considerations you will 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 apart from eight specific exclusions contained in the FLSA.
  • Incentive and Bonus Pay
    • The regular rate includes all types of compensation—including things like non-discretionary bonuses, commissions, shift payments, and some non-cash payments depending on the circumstances. Most bonuses are not discretionary and must be included in the regular rate, as it is common to pay out bonuses based on a formula announced ahead of time and designed to incentivize certain behavior.
  • Track 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 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.
  • Impact on Benefits
    • If there are differences in items such as vacation, sick leave, and other policies for exempt and non-exempt employees, an analysis of how to transition reclassified employees to new programs must be completed. 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 to conduct business while traveling or outside of their regular office hours. Perhaps you limit such use for non-exempt employees, so they are not tempted to perform off-the-clock work. In that case, you will need to apply your policies consistently and advise reclassified employees about their new responsibilities.

Even if pay does not change, employees may view a switch to non-exempt status as a demotion. How do we evaluate the impact on morale when making the decision to convert employees? There may not be enough proactive communications, or sharing market data to support your decision to convince employees why you made this decision vs. increasing their pay. The explanation may be that employers 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 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
    • Crafting 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, is needed. Furthermore, 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 updated terms of employment before they take effect. 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
    • Plan to provide detailed training to newly reclassified employees and their managers prior to the changes taking effect. There are a variety of topics to cover including: scheduled hours, overtime approval policies, timekeeping procedures, recordkeeping requirements, rules about meal and rest breaks, policies on using personal devices for work, prohibition on off-the-clock work, etc.
Conclusion:

We will continue to monitor developments from the DOL’s Wage and Hour Division and provide updates.

 


 

EXHIBIT 1: Testing for Compliance

When classifying employees, the testing requires compliance with two considerations: wages and job responsibilities. These two must be considered in tandem fulfilling just one of these tests does not automatically lead to an employee’s classification as exempt or nonexempt.

The Wage Test

The wage test sets a minimum pay threshold for overtime exemption. Over that threshold, employees may be exempted from overtime in certain circumstances. Under it, an employee must be eligible for overtime pay regardless of his/her rank or job duties. As of 2020, the minimum salary for exemption has been raised to $684 per week. Previously, the minimum salary had been $455 per week, since 2004. The DOL’s new proposal, if finalized in its current form, would raise the rate to $1,059 a week ($55,068 annualized).

The Duties Test

If an employee earns more than $684 per week, his/her overtime eligibility is determined by looking at job responsibilities.

As provided by the FLSA, the Department of Labor (DOL) enforces seven classes of potentially exempt workers:

  • Executive Employees (EE) – To qualify for the executive employee exemption, all the following tests must be met:
    • The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $684 per week.
    • The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise.
    • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
    • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given weight.
  • Administrative Employees (AE) – To qualify for the administrative employee exemption, all the following tests must be met:
    • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week.
    • The employee’s primary duty must be the performance of office or non-manual work related to the management or general business operations of the employer or the employer’s customers; and
    • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
  • Learned Professionals (LP) – To qualify for the learned professional employee exemption, all the following tests must be met:
    • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684*per week.
    • The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment.
    • The advanced knowledge must be in a field of science or learning; and
    • The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
  • Creative Professionals (CP) – To qualify for the creative professional employee exemption, all the following tests must be met:
    • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week.
    • The employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
  • Computer Employees (CE) – To qualify for the computer employee exemption, the following tests must be met:
    • The employee must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour.
    • The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below.
    • The employee’s primary duty must consist of:
      • The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications.
      • The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on, and related to user or system design specifications.
      • The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
      • A combination of the duties, the performance of which requires the same level of skills.

Outside Sales Employees (OE) – To qualify for the outside sales employee exemption, all the following tests must be met:

    • The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which the client or customer will pay a consideration; and
    • The employee must be customarily and regularly engaged away from the employer’s place or places of business.

Highly Compensated Employees (HE) – Highly compensated employees performing office or non-manual work and paid total annual compensation of $107,432 or more (which must include at least $684 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

Primary Duty

Primary duty means the principal, main, major, or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job.

Salary Basis Requirement

To qualify for exemption, employees must be paid at not less than $684 per week on a salary basis. These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine. Exempt computer employees may be paid at least $684 on a salary basis or on an hourly basis at a rate not less than $27.63 an hour.

Being paid on a salary basis means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to exceptions listed below, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a salary basis.

If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis, to satisfy up to 10 percent of the standard salary level. Additionally, if after the 52-week period, the employer has not met its financial obligation, the employer can make a final catch-up payment within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.

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