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Understanding the proposal to extend overtime

Earlier this year, the U.S. Department of Labor announced a proposal to revise the regulations relating to the white-collar exemptions from overtime and minimum wage under the Fair Labor Standards Act. In the Notice of Proposed Rulemaking (NPRM), the DOL proposed increasing the standard salary threshold and the highly compensated employee total annual compensation threshold for those workers exempt under the white-collar exemptions, as well as providing an automatic updating mechanism to adjust the thresholds every three years.

The proposed new rule would increase the standard salary level from $684 to $1,059 per week, which equates to $55,068 annually for a full-year worker. This is more than a 50% increase from the current threshold of $35,568 a year. The proposals would also increase the highly compensated employee total annual compensation threshold from $107,432 to $143,988. The DOL stated in the NPRM that the proposed rule would result in overtime pay for an estimated 3.6 million additional workers.

The NPRM also proposes automatically updating the salary threshold every three years to reflect current earnings data. Every three years, the DOL will publish a notice in the Federal Register and on the Wage and Hour Division’s (WHD) website at least 150 days before the date of the update of the standard salary level and the highly compensated employee total annual compensation requirement. The 150 days’ notice serves to provide employers with sufficient time to make any necessary adjustments.

The DOL is also proposing to increase the salary threshold in U.S territories, which have not been changed since 2004. The standard salary level will apply to employees in all territories that are subject to the federal minimum wage — Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands (CNMI) — but will maintain a special salary level only for employees in American Samoa, as that territory remains subject to special minimum wage rates.

The DOL is not proposing any changes to the standard duties test requirements for the white-collar exemptions in this rulemaking.

Upon publication in the Federal Register, the NPRM will be open for public comment until Oct. 29, 2023. The 60-day proposed effective date is shorter than the effective dates for the 2004, 2016, and 2019 rules, which were between 90 and 180 days. The DOL will consider all comments received before publishing a final rule.

Some attorneys suggest that the lack of a Senate-confirmed labor secretary makes the regulation more vulnerable to legal action. Several groups have already signaled an intention to challenge the proposed rulemaking through litigation. There may also be a response from states in business-friendly jurisdictions like Texas and Florida. This aligns with prior DOL rulemaking history. In 2016, the Obama administration released a similar proposal to raise the salary level to over $900 per week. A Texas federal judge blocked the rule just days before it was set to take effect. The DOL stopped pursuing the 2016 rule at that time due to a change in the presidential administration.

Those seeking to oppose the new rule will now be able to rely on Supreme Court Justice Brett Kavanaugh’s dissenting opinion in the Helix Energy case, in which he argued that the DOL does not have statutory authority to issue a salary-basis or salary-level test absent congressional approval.

Best practices for employers

Employers may need to adjust their pay practices as this change could make more employees eligible for overtime premiums.

Employers should review current position classifications and pay scales to determine how many exempt employees earn between $35,568 and $55,068 annually. Employers can use these findings to estimate the potential cost of increasing the pay of those employees currently earning below the proposed threshold.

Employers can also track and analyze the number of hours worked per week for exempt positions currently earning below $55,068 annually, to evaluate the potential cost of converting those employees to non-exempt, hourly workers.

Employers should verify that all company policies related to proper timekeeping procedures, approval of overtime, use of company equipment or personal devices to conduct business during non-work hours, meal and rest breaks, and remote work, among others, are up to date.

Finally, employers should plan on providing employees with advance notice of these changes. Employers should prepare a written communication to each employee outlining the specific changes to their compensation and the new responsibilities included with the changes, such as timekeeping, meal and rest breaks, and other requirements.

This article was drafted by Toni Ojoyeyi, an employment law attorney in Spencer Fane’s Minneapolis, Minnesota, office.