By Anne Marie Welch
On August 30, the U.S. Department of Labor issued its much-anticipated notice of proposed rulemaking ("NPRM") to update the Fair Labor Standards Act's overtime exemptions. If finalized, the rule would raise the salary threshold to qualify for the executive, administrative, and professional (EAP) exemptions to $55,068 per year - up from the $35,568 annual salary under the current rule.
Beyond the salary increase for the EAP exemptions, the rule also proposes a salary level increase for the "highly compensated employee" ("HCE") exemption; an automatic update to these earnings thresholds every three years; application of the standard salary threshold to U.S. territories subject to the full federal minimum wage; an increase of the special salary levels for American Samoa (84% of standard salary level) and the motion picture industry ($1,617/week or a proportionate amount based on the number of days worked); and, maintenance of the existing duties test for executive, administrative and professional employees.
Employers have 60 days from the date the NPRM is published in the Federal Register to submit comments regarding the NPRM. The DOL may make adjustments after reviewing the comments submitted and the rules may also be the subject of legal challenges. Nonetheless, employers should begin reviewing their practices now to determine whether changes would need to be made to comply with the new rule and consult with their counsel regarding how best to implement those changes if and when the rule is finalized.
1. Increase in the salary threshold for certain exemptions
Under the current EAP exemption, an employee must generally be paid on a salary basis, primarily perform executive, administrative, or professional duties, and be paid at least $684/week (which is equivalent to $35,568 annually). The proposed new rule would significantly increase the weekly salary threshold to $1,059/week ($55,068 annually) for executive, administrative, and professional employees to be exempt from overtime.
2. Increase in the annual salary level for employees to qualify for the highly compensated exemption
The rule also proposes an increase in the salary level required for employees to qualify for the highly compensated employee exemption. Under the proposed rule, employees will have to earn at least $143,988 annually to qualify for the exemption (up from the current annual threshold of $107,432).
3. Automatic increases every three years
The last increases to the EAP salary threshold and HCE total compensation requirement became effective in 2020. Under the proposed rule, the EAP salary threshold and the HCE total compensation requirement would automatically increase every three years to reflect current earnings data. The EAP would be adjusted to remain at the 35th percentile of weekly earnings of full-time non-hourly workers in the lowest-wage census region (currently the South). The HCE total annual compensation requirement would remain at the annualized weekly earnings of the 85th percentile of full-time non-hourly workers nationally. The DOL proposes to publish a notice with the new earnings levels at least 150 days before the effective date of the update. In the event of unforeseen economic or other conditions, however, the DOL would retain the discretion to delay a scheduled automatic update.
4. No changes to the duties test for the exemptions
For an employee to qualify for one of the exemptions under the FLSA, the employee must satisfy a salary test and a job duties test. The job duties test examines whether the employee's actual job functions meet the requirements of the applicable exemption. Under the proposed rule, there are no changes to the duties test.
5. Adjustments to the current salary thresholds applicable to U.S. territories
The DOL proposes to apply the $1,059 weekly EAP salary threshold to employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands, where the federal minimum wage is applicable. The DOL would set a special salary threshold for employees in American Samoa equal to 84% of the standard salary level until 90 days after the minimum wage for American Samoa equals the federal minimum wage. Thereafter, the full $1,059 weekly EAP salary threshold would apply.
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Anne Marie Welch is an attorney at Clark Hill PLC. She defends employers in lawsuits and administrative proceedings against wrongful discharge, discrimination, harassment, retaliation, and related statutory and tort claims. She also prosecutes and defends against breaches of non-competition, non-solicitation, and confidentiality agreements.
