On August 30, 2023, the U.S. Department of Labor (DOL) unveiled a proposed overtime rule that would raise the Exempt Salary Threshold under the Federal Labor Standards Act (FLSA) from $684 to $1,059 weekly, which equates to $55,068 annually. The proposal would also increase the annual salary threshold for highly compensated employees from $107,432 to $143,988 annually. The rule would extend overtime protections to an estimated 3.6 million salaried workers if implemented.
What is the Exempt Salary Threshold?
The exempt salary threshold refers to employees’ minimum salary level to be classified as ‘exempt’ from receiving overtime pay. In the United States, the threshold is primarily associated with the Fair Labor Standards Act (FLSA), a federal law that establishes labor standards such as minimum wage and overtime pay. In addition, employees must meet specific tests regarding their job duties to qualify for the exemption and be paid on a weekly or longer salary basis. Most states align with the FLSA Duties Test, with some exceptions.
Under the FLSA, most employees are entitled to receive overtime pay at one and a half times their regular hourly wage for all hours worked beyond a 40-hour workweek. However, there are exemptions for specific categories of employees, such as those classified as “salaried exempt,” who are not entitled to overtime pay regardless of the number of hours they work. One of the criteria for qualifying as a salaried exempt employee is meeting a minimum salary threshold set by the DOL.
Under the Trump administration, the DOL issued a new rule in 2019 to update the salary threshold. The threshold was raised to $684 weekly, or $35,568 annually. This rule went into effect on January 1, 2020. Adjusted for inflation, that amount today would be $42,594 annually.
What should companies do next?
Companies should review these steps when evaluating the Exempt Salary Threshold:
- Identify salaried employees making less than the new proposed exempt salary threshold.
Employers should review all current exempt salary employees who make below the new proposed threshold of $55,068 annually.
- Review the duties test for these employees.
Employers should review the FLSA Duties Test and any state duties test to verify they qualify to be exempt salary employees before looking at pay. Update any job descriptions as needed.
- Decide whether to increase the employee’s salary to the new threshold or change them to hourly non-exempt employees.
Estimate how many hours these employees typically work, and calculate how much overtime would cost by making them hourly employees. Remember to include any non-discretionary bonuses that would count toward blended overtime.
- Review employee compensation budget
Remember to augment your budget appropriately once an analysis of new compensation levels for the affected employees is calculated. Remember to change any current posted job openings with the new pay range.
- Develop a communication strategy for these employees
Employers considering reclassifying employees or changing compensation or hours worked could face potentially challenging conversations with affected employees.
The DOL will allow employers to make catch-up payments to employees who do not earn enough in non-discretionary bonuses or incentive payments in a given 52-week period to retain exempt status, provided that the catch-up payment is made within one pay period of the end of the year. In addition, DOL also is proposing automatic increases every three years to the overtime threshold.
Remember, state labor laws can have their own overtime exemption thresholds, which may be higher than the federal threshold. In such cases, employees are entitled to the higher standard. As an example, Washington currently has a weekly rate for small businesses (1-50) employees of $1,101.80 weekly ($57,293.60 annually) and $1259.20 weekly ($65,478.40 monthly) and increases to adjust for cost of living annually. In California, this threshold is twice the state minimum wage (currently $15.50/hour) or $64,480 per year. Other states can be seen here.
How can we help?
Companies may want to know the actual hours of salaried employees who fall below the new federal rules. Tracking these hours can help companies understand the potential impact of converting to non-exempt status and make an informed decision when the time comes. Time Equipment Company can help set this up for you.
For more information about tracking time for these employees, contact Time Equipment Company at firstname.lastname@example.org or 800-997-8463.
*This information simplifies complex Acts as Time Equipment Company understands them. It is not legal advice. The regulations for this program are changing. For further information, contact the U.S. Department of Labor.