The U.S. Department of Labor has announced a proposed rule that, if implemented, will significantly raise the overtime exemption salary threshold for white-collar exemptions and the highly compensated employee exemption threshold. The automatic increase is similar to what the DOL unsuccessfully attempted to set in 2016. Does the DOL’s proposed overtime wage thresholds affect you or your business?
The White-Collar Exemption Threshold
The proposed rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, outside Sales and Computer Employees, will raise the white-collar exemption threshold under the Fair Labor Standards Act to $1,059 a week, which is approximately $55,068 a year. Today’s threshold is $684 a week, or about $35,568 per year.
This suggested salary threshold is based on the 35th percentile of weekly earnings for full-time workers in the Southern United States. According to the U.S. Census, this is the region with the lowest wages.
The Highly Compensated Employee Exemption Threshold
For highly compensated employees, the proposed salary threshold would go from $107,432 to $143,988. This is based on the 85th percentile of salaried workers nationally. Commissions, nondiscretionary bonuses, and incentives will cover up to 10 percent.
In addition to raising the salary threshold, the DOL is also proposing the salary ceiling to automatically increase every three years.
Overtime Wage Thresholds: The Proposed Rule’s Impact
A goal driving this proposed rule is to provide overtime protections to lower-paid salary workers. The DOL’s position is that lower-paid salary workers often work long hours and perform the same tasks as hourly employees, who are eligible for overtime.
The DOL noted that the proposed rule “would help restore workers’ economic security by giving millions more salaried workers the right to overtime protections if they earn less than $55,000 a year.” More specifically, about 3.4 million workers currently exempt under today’s regulations would become newly entitled to FLSA overtime protections. An additional 248,900 workers would become eligible for overtime if the highly compensated employee exemption threshold is raised.
What Employers Need to Know
If the proposed rule is implemented, small employers, nonprofits, and the hospitality, retail, and health care industries will be impacted the most.
Employers should start preparing now for new plans to comply with the proposed rule.
As an initial step, employers should conduct an audit of their current workforce and figure out which positions might have to be reclassified as non-exempt and eligible for overtime under the new rules and/or will require a salary bump to meet the new minimum salary threshold. Given the substantial increase in the salary level set by the DOL, employers will have to consider whether to reclassify those employees as nonexempt and eligible for overtime or give them raises to maintain their exempt status. Employers not prepared to make the leap should estimate future overtime costs and make adjustments accordingly. One adjustment may include redistributing work to reduce newly eligible employees’ overtime hours.
With added non-exempt employees comes added compliance liability risks. Hence, employers should ensure that they have accurate time-keeping policies and procedures to address an increase in non-exempt employees. This may require the purchase of new time record devices and software. Also, employers should audit their current employee handbooks and policies regarding time keeping and overtime. In particular, employers should have policies in place that require employees to accurately report time worked, prohibit working overtime without authorization, prohibit off-the-clock work, and provide a reporting mechanism to address payment errors.
Having sound policies is important, but seldom sufficient by itself. It is equally important to train employees about the new overtime regulations.
The proposed rule is currently up for public comment. Interested employers may submit comments on the proposed rule until November 7, 2023. If your company’s payroll will be impacted by this new rule and you would like guidance on how this rule affects overtime wage thresholds and your company, please reach out and let us know how we can help.