Proposed Overtime Changes: Impacts and Insights

On August 30, 2023, the Department of Labor (DOL) proposed changes to Salary Level Test to expand the number of employees eligible for overtime. The Fair Labor Standards Act (FLSA) mandates employees working beyond a 40-hour week are entitled to overtime pay of at least 1.5 times their standard rate. The Act, however, includes a “white-collar” or executive, administrative, or professional (EAP) exemption. This exemption means that employees operating in a genuine executive, administrative, or professional capacity aren’t entitled to the minimum wage or overtime pay benefits of the Act.

Over the years, to determine who falls under this EAP exemption, three tests have generally been applied:

  1. The Salary Basis Test: The employee must earn a fixed and predetermined salary, which isn’t subject to change based on their work quality or quantity.
  2. The Salary Level Test: The salary paid must meet a specified minimum amount.
  3. The Duties Test: The primary job responsibilities of the employee must be executive, administrative, or professional as defined by regulations.

It’s worth noting that the mere title of a job or its description doesn’t necessarily decide its EAP status. Similarly, paying an employee a salary doesn’t automatically render them exempt.

New Proposed Threshold for Salary Level Test

The new proposal set forth by the DOL seeks to redefine the compensation parameters in relation to the Salary Level test. This proposal suggests the following:

  • Standard salary level be increased from the current $35,568 per year to the 35th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region ($1,059 per week or $55,068 annually).
  • Highly compensated employee (HCE) total annual compensation threshold be increased from the current $107,432 annual compensation to the annualized weekly earnings of the 85th percentile of full-time salaried workers, which equates to $143,988, of which at least $1,059 per week would have to be paid on a salary or fee basis.

Ongoing Automatic Salary Level Updates

The current overtime regulations do not include a mechanism of automatic updates. The new proposed overtime changes includes an automatic update provision that would change the standard salary and the highly compensated employee threshold every three years to reflect current earnings data.

The DOL plans to adjust the standard salary level to match the 35th percentile of weekly earnings of full-time non-salaried workers in the lowest-wage Census Region. Additionally, the DOL aims to set the HCE total annual compensation requirement to the 85th percentile of such workers’ earnings on a national scale. To determine these thresholds, the DOL will use the latest four quarters of data from BLS prior to announcing the automatic updates. However, there is a provision allowing the DOL to temporarily delay a scheduled automatic update where unforeseen circumstances arise.

Economic Effects of Proposed Changes to Overtime

Economically, these changes will have a direct impact on employers. The DOL estimates the updated regulations will expand overtime eligibility to some 3.4 million workers. It is estimated the changes to the rule will result in $1.2 billion of direct costs on employers including regulatory familiarization costs, managerial costs, and adjustment costs. The Department also estimates the ruling will result in a Year 1 income transfer of $1.2 billion from employers to employees primarily through new overtime premiums or pay raises to maintain exempt status of affected employees.

What’s Next?

Once the DOL publishes the proposed rule in the Federal Register, the proposal will be subject to a 60-day public comment period. Subsequently the agency will review comments and determine whether to modify the rule or move forward with the final rule.

Employers are not obligated to change how they classify or pay employees until the DOL’s proposed rule becomes final. However, potentially impacted employers will want to follow the DOL’s rule-making process closely.

Have Questions On Proposed Changes to Overtime? Contact MyHRConcierge

Do you have questions about how this proposed ruling may affect your business? MyHRConcierge can help. We provide human resources compliance counseling for all types of small to mid-sized businesses across the United States. Contact us today at 855-538-6947 xt 108, or schedule a consultation below: