Employers Should Prepare for Proposed DOL Rules To Disqualify Additional 4 Million Workers For FLSA Exempt Status


Heads up employers! The Department of Labor Wage and Hour Division plans to raise by more than 35 percent the minimum salary required for an employee to qualify as exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (“FLSA”) under the exemption for executive, administrative, and professional employees (commonly referred to as the “white-collar exemption”) as well as increase the minimum compensation that an employee must earn to qualify as an exempt employee under the special rule allowing employers to treat certain “highly compensated employees” as exempt. If changes proposed in the Notice of Proposed Rulemaking (Proposed Rule), Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees (“Proposed Rule”) released August 30, 2023 will significantly increase the labor costs for employers of the more than 4 million employees projected to cease to qualify as exemption from the FLSA minimum wage and overtime requirements. All employers relying on these exemptions should reevaluate and adjust their compensation budgets and other compensated dependent projections to account for the expected impact of these changes. Additionally, employers and others concerned by these proposed changes should comment to the Labor Department by as well as express their concerns to relevant members of Congress.

Proposed White-Collar Exemption Salary Level Test Compensation Increase

The white-collar exemption to the FLSA generally exempts an employee from the FLSA minimum wage and overtime requirements if the employee Is employed in a bona fide executive, administrative, or professional (EAP) capacity as those terms are defined in the Department of Labor’s regulations at 29 CFR part 541.

Currently, an employee generally must meet the following conditions to qualify as an exempt employee under the white-collar exemption:

  • Be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);[1]
  • Be paid at least a specified weekly salary level, which currently is $684 per week (the equivalent of $35,568 annually for a full-year employee) in the current regulations (the “salary level test”); and
  • Primarily perform executive, administrative, or professional duties, as provided in the Department’s regulations (the “duties test”).

The Proposed Rule would Increase the minimum salary that an employee must earn to meet the salary level test by 35 percent from $684 per week ($35,568 annually) to $1,059 per week ($55,068 annually). This represents an immediate more than 35 percent increase in the minimum salary that an employer must pay an employee to treat the employee as exempt from minimum wage and overtime requirements. The Proposed rule also would extend the applicability of the standard salary level to Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands, and increase the special salary levels for American Samoa and the motion picture industry.

Proposed Highly Compensated Employee Annual Compensation Increase

The Proposed Rule also seeks to increase the total annual compensation that an employee must earn to qualify as exempt as a highly compensated employee.

Presently, a highly compensated employee is deemed exempt under Section 13(a)(1) even though the employee does not meet all of the other requirements in the standard white-collar test for exemption as an executive if:

  • The employee earns total annual compensation of $107,432 or more, which includes at least $684* per week paid on a salary or fee basis;
  • The employee’s primary duty includes performing office or non-manual work; and
  • The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

The required total annual compensation of $107,432 or more, which includes at least $684 per week paid on a salary or fee basis, may otherwise consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period, but does not consist of credit for board, lodging, or other facilities, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits.

Additionally, the weekly salary amount of $684 must be paid in its entirety. Employers may not use nondiscretionary bonuses and incentive payments (including commissions) to satisfy any portion of the weekly standard salary level for highly compensated employees.

The Proposed Rule would increase the total annual compensation requirement for an employee to qualify as a highly compensated employee from $107,432 to $143,988 per year, which would be required to include at least $1,059 per week.

Proposed Automatic Adjustments Every Three Years

The Proposed Rule also calls for automatic updates to the earnings thresholds applicable under the White-Collar Exemption every three years based on then current wage data.

FLSA Violations Expensive

As costly as complying with applicable FLSA minimum wage and overtime rules can be, violations are worse as illustrated by the $324,049 in back wages and liquidated damages that a federal judge just ordered home health provider Destiny Healthcare Services Inc. and its owner to pay for wrongfully failing to pay required overtime to 159 workers.

From October 2020 through October 2022, Wage and Hour Division investigation determined owner Mirza Baig and administrator Sonia Chalal did not keep accurate records of hours worked and paid the affected workers straight-time wages for all hours worked. By doing so, the Westchester-based employers failed to pay overtime as required by the FLSA.

In Su v. Destiny Healthcare Services, Inc,. Mirza Baig, Sonia Chalal, the Labor Department obtained a consent order resolving all issues, including payment of $324,049 in back wages and liquidated damages, and an injunction for future compliance. The award included $162,024.69 in unpaid overtime compensation and the additional sum of $162,024.69 in liquidated damages,

Businesses Should Prepare For Compensation Cost Increases

Given the proactivity of the Biden Administration led Labor Department, employers generally should prepare for the Labor Department to move quickly to finalize and adopt the changes set for the Proposed Rule.

Given this likelihood, all employers should evaluate the extent to which the changes in the Proposed Rules are likely to require the employer to reclassify and treat as non-exempt ay employee the employer currently classifies as salaried and if so, identify and prepare to implement any changes to compensation necessary to maintain compliance with the modified rules when effective. Where the job position warrants increased compensation, an employer may want to increase compensation for a worker that otherwise meets the required conditions to qualify as exempt. In other cases, employers should evaluate the current compensation structure to determine whether and how to convert the current salaried compensation to an hourly rate of pay in a manner defensible under the FLSA minimum wage and overtime rules as well as the process changes required to track and document hours of work and other additional data necessary to comply with recordkeeping requirements of the FLSA. In some instances, it may be possible for the employer to restructure the current salary as a base wage plus overtime rate for overtime rate without materially increasing compensation costs for the impacted employee. In other cases, however, employers may want to begin recruiting additional workers or making other changes to mitigate the projected impact of the required conversion of employees currently classified as salaried to hourly under the Proposed Rule.

Additionally, employers also should evaluate and begin preparing for the expected broader impact of the changes in their compensation budgets, as well as other wage dependent costs and product or service pricing to account for the expected impact of these changes. These projections should anticipate both the direct impact, if any, of the expected labor costs increases that the employer expects to experience in its workplace, as well as the indirect inflationary effect on costs likely to result from increased labor costs of suppliers and others.

While bracing for the likely adoption of the Proposed Rules, employers and other concerned about these impacts or other changes proposed in the Proposed Rule should share their input by commenting within the 60-day period following official publication of the Proposed Rule on the Proposed Rule through the Federal eRulemaking Portal or by mail to Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W., Washington, DC 20210.

[1] Certain employees are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers).

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This entry was posted on Thursday, August 31st, 2023 at 10:16 AM and is filed under Corporate Compliance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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