The U.S. Department of Labor (DOL) has just dropped a bombshell in the world of labor regulations. In a move that could have far-reaching consequences for both employers and employees, the DOL has officially unveiled its proposed rule to increase the minimum salaries required for certain employees to be classified as exempt from minimum wage and overtime laws.
While we typically refrain from reporting on proposed rules due to their propensity for change and the uncertainty surrounding their effective dates, the potential significance of this rule change demands our attention.
Currently, under the Fair Labor Standards Act (FLSA), executive, administrative, and professional employees must be paid a minimum of $684 per week or $35,568 per year to qualify for exemption. These exemptions are collectively known as “EAP.” The proposed rule, if adopted in its current form, would raise the salary threshold significantly, requiring EAP employees to earn at least $1,059 per week or $55,068 per year to maintain their exempt status.
But that’s not all. Employees who currently fall under the highly compensated employee (HCE) exemption, which has its own specific criteria, must be paid a minimum of $107,432 per year. The proposed rule seeks to elevate this threshold as well, demanding that HCE employees earn a minimum of $143,988 per year to remain classified as exempt.
Perhaps most notably, if the proposed rule is accepted as is, it would introduce a mechanism for automatic updates to the EAP salary level and HCE total annual compensation requirement every three years. This could potentially result in even higher salary thresholds down the line.
The proposed rule is expected to be published imminently, initiating a 60-day comment period during which the DOL will be open to receiving comments, suggestions, complaints, and arguments from stakeholders, including employers and employees alike.
Once the comment period concludes, the DOL will review the feedback and may make revisions before issuing the final rule. The duration of this review and revision process remains uncertain, but it’s safe to assume it will span at least several months. The DOL has hinted that the changes could become effective as soon as 60 days after the final rule’s publication.
However, it’s crucial to note that the last time the DOL attempted a substantial change to the minimum salary thresholds, the rule was challenged in litigation just weeks before it was set to take effect. While we can’t predict the outcome this time around, it’s quite possible that the rule change will face legal battles.
While it might be premature to assess the full implications of this rule change, employers looking to get a head start on planning should consider the following:
Reclassification of Employees: Many employees might need to be reclassified as nonexempt, leading to administrative challenges.
Overtime Costs: If exempt employees fall below the proposed minimum salary and regularly work over 40 hours per week, budgeting for their overtime pay will be essential.
Operational Adjustments: If overtime costs become prohibitive, employers may need to redistribute work, optimize efficiencies, or even make alterations to their business models.
Training for Nonexempt Employees: Those transitioning from exempt to nonexempt status will require training in nonexempt employee practices, such as timekeeping, meal and rest break compliance, and adherence to overtime policies.
State Laws Prevail: Keep in mind that if state laws dictate higher minimum salaries than what the federal rule requires or will require, employers must adhere to the state minimums.
This proposed rule change has the potential to reshape the landscape of labor regulations, and employers must remain vigilant as they prepare for the potential adjustments that lie ahead. Stay tuned for further updates as this rule progresses through the comment and revision process. If you’d like to review the proposed rule, you can find it here.
For Fractional HR Services, contact Zinn today. We are here to help.
