The U.S. Department of Labor (DOL) published its highly anticipated Notice of Proposed Rulemaking, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees to the Federal Register on September 8, 2023. Comments will be accepted for 60 days, until November 7, 2023.
What is being proposed?

The proposed rule includes three major updates:

1. Increase the minimum salary threshold for the white-collar exemptions (e.g., executive, administrative, professional employees, outside sales and computer employees) from $684/week to $1,059/week;
2. Increase the minimum salary threshold for highly compensated employees from $107,432/year to $143,988/year; and
3. Provide for automatic updates to the minimum salary thresholds every three years based on wage survey data.

Why does this matter?

The Fair Labor Standards Act (FLSA) requires workers to be paid at least the minimum wage for all hours worked and one and one-half times their regular rate of pay for any hours worked in excess of 40 hours in a workweek unless one of the exemptions applies. The most common exemption is commonly referred to as the “white-collar” or executive, administrative, or professional (EAP) exemption.

Under the FLSA, the Secretary of Labor has the authority to define the terms of the exemption.  Currently, the DOL applies a three-part test for the exemption to apply:

1. 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;
2. Salary level test: The amount of the salary paid must meet a minimum specified amount (currently $684/week); and
3. Duties test: The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

For more information on the duties test, see DOL Fact Sheet #17A. HEC members may also click here for our FLSA Job Analysis guides.

The proposed rule would significantly impact the second prong of this test by increasing the salary level by almost 55% to at least $1,059/week. The DOL estimates this change would impact about 3.4 million workers currently classified as exempt and earning between the current salary threshold of $684/week and the proposed salary threshold of $1,059/week.

How did we get here?

In 2004, for the first time in almost 30 years, the DOL updated the salary threshold to the $455/week many of us remember.

After over 15 years with the $455/week salary threshold, the DOL issued a final rule in 2016 increasing the salary threshold to $913/week, which was based on the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region (the South), among other changes. Later that year, amid legal challenges to the final rule, a District Court in Texas enjoined the DOL from implementing and enforcing the rule. In 2017, the court found that the DOL exceeded its authority in issuing the rule.

In response, the DOL issued a new final rule in 2019 which rescinded the 2016 rule and increased the salary threshold to the current $684/week, which was based on the 20th percentile of the weekly earnings for full-time salaried workers in the lowest-wage Census Region (the South), among other changes.

The current proposed rule is based on the 35th percentile of the weekly earnings for full-time salaried workers in the lowest-wage Census Region (the South).

Will this rule go into effect?

As we saw in 2016, legal challenges to this rule are expected. Legal challenges are likely to rely on the Texas court’s decision in 2017, as well as Justice Kavanaugh’s dissent in Helix Energy Solutions Group v. Hewitt. Justice Kavanaugh argued that the FLSA “focuses on whether the employee performs executive duties, not how much an employee is paid or how an employee is paid.” Therefore, he argued, “It is questionable whether the [DOL]’s regulations —which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid —will survive if and when the regulations are challenged as inconsistent with the Act.” Challengers to the proposed rule are likely to argue that the salary threshold and automatic updates exceed the DOL’s authority to define the executive, administrative, and professional exemption.

Additionally, industry groups have questioned the DOL’s authority to issue such a rule with no permanent Secretary in place. This challenge is not likely to succeed, though it may be interesting to watch.

So, what should I do now

While the rule is not yet final nor implemented and is likely to face numerous legal challenges, employers should start preparing for the possibility it will go into effect. Taking the “wait-and-see approach runs the risk of waiting too long. If this rule goes into effect as-is, there could be a significant impact on an employer’s business. Even though a similar rule with a lower salary threshold was previously overturned, employers should not assume challenges will prevail this time around.

To prepare, employers should identify which positions or jobs are currently classified as exempt and are being paid under the proposed salary threshold. Also note since the proposed rule ties the salary threshold to current wage data, the final rule will be based on the most recent data available. The DOL anticipates if the final rule is issued in the fourth quarter of 2023 (not likely due to the timing and anticipated volume of public comments), the salary threshold could be $1,140/week, $59,285/year. Further, if the rule is issued in the first quarter of 2024 (more likely, if not later), the salary threshold could be $1,158/week or $60,209/year. Comments may be submitted electronically or by mail. Electronic comments can be filed through Regulations.gov (click on "Comment"). Mailed comments should be sent to: Division of Regulations, Legislation and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, D.C. 20210.

Once the potentially impacted positions or jobs are identified, employers will have to determine how they will ensure compliance. The two most common options would be to either raise the salaries to at least the required minimum salary threshold or to convert the position to non-exempt. Each option has its benefits and drawbacks. HEC members may contact their HR Consultant to discuss these and other options.