Reminder: Department of Labor Proposed Rule Updating Overtime Regulations Under the Fair Labor Standards Act is Pending  |  By: Catherine A. Veeneman

The Department of Labor (DOL) recently issued a proposed rule that would update regulations issued under the Fair Labor Standards Act (FLSA) to, among other things, increase the standard salary level and increase the highly compensated employee total annual compensation threshold in an effort to keep up with the changing economic environment and decrease misclassification of non-exempt workers as exempt workers.

The FLSA requires covered employers to pay employees a set minimum wage and, when applicable, overtime premium pay of at least 1.5 times the employee’s regular rate of pay.  An employee may be exempted from these protections, however, if they are deemed to be “employed in a bona fide executive, administrative, or professional capacity,” commonly referred to as the executive, administrative, or professional exemption (EAP exemption).  For an employee to be exempted from overtime protection under the EAP exemption, the following three tests must be met: “(1) 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 (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test).”  This FLSA standard is notably less strict than its California counterparts, which require a showing of additional elements before an employee may be classified as exempt.

The proposed rule affects the salary level test by increasing the standard salary level and the earnings threshold for highly compensated employees to keep up with the changing economic landscape and ensuring non-exempt employees are not inadvertently classified as exempt simply because of their salary level.  Specifically, if finalized, the proposed rule would increase the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest wage Census Region, which comes out to $1,059 per week or $55,068 annually for a full-year worker.  The proposed rule would also increase the highly compensated employee total annual compensation threshold to the 85th percentile of full-time salaried workers nationally, or $143,988 a year.

This proposed rule arises from the DOL’s determination that application of related regulations over the past 20 years has become too convoluted and requires clarification.  Specifically, the DOL noticed there were two distinct approaches towards how EAP exemption status was determined: the first approach used the rules established by the DOL in 2004 and 2019 to exempt lower-paid workers who historically were provided overtime as they did not meet the more detailed duties requirements of the test in place prior to 2004.  The other approach used a rule in 2016 to restore overtime protection to lower-paid white-collar workers whose job entailed significant amounts of non-exempt work while also removing from exemption other lower-paid workers who historically were exempt under the prior test.  With the proposed rule, the DOL claims it is trying to find a balance between these approaches by establishing a more effective test.  It determined the best way to do this was to raise the compensation threshold for certain groups of employees.

The proposed rule also suggests regularly updating earnings thresholds to ensure that regulations remain effective and do not result in unintended exemption of employees that are in truth non-exempt.  Currently, the DOL estimates that should the proposed rule be implemented, about 3.4 million employees that would be classified as exempt under the current standards would become eligible for overtime protection.  The DOL also believes the proposed changes to the highly compensated employee exemption test would make roughly 250,000 employes currently classified as exempt non-exempt.

In terms of what employers should be doing to prepare for this change, it should be noted that the rule is only a proposed rule and is not yet final.  Although the comment period has been closed, the rule will not become effective until a final rule is published by the DOL.  However, it seems likely that some form of the rule will become final, and the proposal should give employers an idea of where minimum wage law is headed under the Biden administration.  Employers should therefore consider auditing the state of their salaries and determine which currently exempt employees could become non-exempt under the proposed rule.  These employers would then need to decide whether to increase salaries to maintain the exemptions, or allow affected employees to be reclassified as non-exempt and provide appropriate overtime pay.  Employers operating in California should already be in compliance with this proposed rule, considering the stricter exemption tests in California and higher minimum salary requirements already active in the state; nevertheless, periodic auditing of job duties and pay for all California employers is highly recommended.

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