Practical Implications of the DOL’s Proposed Increase to the Minimum Salary Level for Exempt Employees

Background
The FLSA generally requires employers to pay all employees a minimum wage (currently $7.25 an hour) for all hours worked, along with overtime of at least 1.5 times the employee’s regular rate of pay for any hours worked in excess of 40 hours per week. Section 13(a)(1) of the FLSA, however, includes significant exemptions under which employees are not entitled to—or are “exempt” from—these minimum wage and overtime requirements.

The most commonly invoked exemptions are the “white-collar” exemptions, which apply to any employee “employed in a bona fide executive, administrative, or professional capacity.” In general, for an employer to properly categorize an employee as exempt under the white-collar exemption, the employee must:

• be paid a fixed salary;
• earn a salary of at least the minimum specified amount (currently $35,568 annually);^[1] and
• satisfy the “duties” test for the exemption, which requires that the employee’s job duties primarily involve executive, administrative, or professional duties.

Employees may also be exempt from overtime requirements if they are categorized under the “highly compensated employee” exemption. Employees will properly fall within this exemption if they earn the minimum specified salary amount (currently set at $107,432) and perform one or more of the white-collar duties.

DOL’s Proposed Rule
The NPRM proposes revisions to the minimum salary level for the white collar and highly compensated employee exemptions to the FLSA—and by significant amounts. Specifically, the DOL proposes increasing the minimum salary threshold for the white-collar exemption from $684 per week ($35,568 annually) to $1,059 per week ($55,068 annually).

This proposed salary is based on the most recent census data and is set at the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage Census Region (currently the South). The current FLSA regulations, which went into effect on January 1, 2020, set the minimum salary level at the 20th percentile mark.

Additionally, the DOL seeks to increase the minimum salary threshold for highly compensated employees from $107,432 to $143,988 annually, which is set at the 85th percentile of weekly earnings of full-time non-hourly workers nationally.

Finally, the NPRM requires that these minimum salaries be automatically adjusted every three years to remain at their respective percentiles of annualized weekly earnings, based on the prior four quarters of wage data. The updated salary levels would be published at least 150 days prior to becoming effective. The DOL would retain the flexibility to delay the automatic adjustment, however, if unforeseen economic or other conditions warrant.

The NPRM does not propose any changes to the current duties tests for the exemptions or the salary basis regulations.

Procedural Posture and Potential Challenge
The comment period will open once the rule has been published in the Federal Register and will remain open for 60 days thereafter. Once finalized, the rule would become effective 60 days after publication.

It is likely that business groups and some states may file legal challenges against the proposed rule. Such legal action occurred in 2016 when the Obama Administration attempted to implement similar legislation, and resulted in the regulation being struck down in its entirety. Although the current NPRM sets the minimum salary level at a slightly lower percentile (35% instead of 40%), groups opposed to the NPRM may bring similar lawsuits, using the earlier court decision as a blueprint.

Practical Impacts
If the proposed minimum salary levels are retained in a final rule, the DOL estimates that, within the first year of implementation, 3.6 million workers would see salary increases or changes in their FLSA classification as a result, and that there would be an income transfer of $1.2 billion from employers to employees in Year One alone (mostly arising from new overtime premiums or salary increases implemented to maintain the exempt status of affected employees).

In the meantime, employers are encouraged to reassess their employee classifications to ensure that employees are properly classified, both in terms of salary threshold and job duties. Given the potential liability for misclassifications—which includes payment of back wages as far back as three years, as well as liquidated damages and attorney’s fees—employers should seek advice of counsel when undertaking such analyses.

Employers may also wish to start tracking the average hours worked by their exempt employees earning less than $55,068, to assess the impact of this proposed rule. If those employees rarely work more than 40 hours a week, the practical effect of converting the employee to non-exempt may be limited. On the other hand, if those employees routinely work more than 40 hours per week, employers may wish to consider cost-cutting strategies, such as reallocating workloads, bringing in part-time or contracted additional support, or reducing less critical work assignments. Alternatively, some employers may decide to increase personnel budgets to account for salary increases or overtime payments to such employees. Even aside from FLSA compliance mandates, employers may find that the new regulation results in high market benchmarks for compensation for those classifications of jobs, and that increasing compensation levels becomes necessary to stay competitive in recruiting and retaining employees.

Employers must also ensure that they comply with applicable state law requirements, many of which exceed even these new federal salary thresholds (including California and New York) and may also have duties tests that vary from the federal regulations.

Employers should also be mindful of the impact of classification and salary on enforceability of restrictive covenant agreements pursuant to state law, as some states, such as Massachusetts and Rhode Island, prohibit non-compete agreements for non-exempt employees.

^{[1] The salary basis rule applies the executive, administrative, or professional exemptions, as well as the highly compensated employee exemptions. Two other exemptions do not require payment on a salary basis: Computer professionals paid on an hourly basis, and outside sales employees. In addition, certain professionals including doctors, lawyers, and teachers are also not subject to the minimum salary tests.}