On August 30, 2023, the United States Department of Labor (DOL) released its highly anticipated proposed overtime rule. This rule, if finalized, would increase the minimum salary amount required to be paid to executive, administrative and professional (EAP) employees and the required annual compensation to be paid to highly compensated employees (HCEs) in order for these employees to be considered exempt from the Fair Labor Standards Act (FLSA) overtime pay requirements. The DOL is also proposing automatic updates to these amounts every three years.
The proposed rule does not include any changes to the standard duties test used to distinguish between FLSA-exempt and non-exempt employees. The DOL estimates that 3.6 million workers exempt from FLSA overtime under the current regulations would become newly entitled to overtime protection under the FLSA.
Is the DOL increasing the overtime threshold in 2023?
The proposed rule will be open for public comment until November 7, 2023, unless extended. The DOL will then issue a final rule, which is expected to take effect sometime in 2024. The final rule is likely to be challenged in court.
Currently, to fall within the EAP exemptions, an employee generally must:
- Be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed (the "salary basis test");
- Be paid at least a specified weekly salary level, which is $684 per week (the equivalent of $35,568 annually for a full-year employee) in the current regulations (the "salary level test"); and
- Primarily perform executive, administrative or professional duties, as provided in the DOL's regulations (the "duties test").
Certain employees are not subject to either the salary basis or salary level tests (i.e., doctors, teachers and lawyers).
HCEs performing office or non-manual work and paid total annual compensation of $107,432 or more (which must include at least $684 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.
Read this fact sheet for more information on the EAP exemptions.
2023 proposed rule
Current overtime rule
Proposed overtime rule
The minimum salary required to be paid to an EAP employee for that employee to be exempt from the FLSA overtime requirements is $684 per week ($35,568 annually).
The minimum salary required to be paid to an EAP employee for that employee to be exempt from the FLSA overtime requirements would be $1,059 per week ($55,068 annually).
The required annual compensation level for HCEs is $107,432 (which must include at least $684 per week paid on a salary or fee basis).
The annual compensation level for HCEs would be $143,988 (which must include at least $1,059 per week paid on a salary or fee basis).
There are no automatic updates to the required EAP salary levels or HCE total annual compensation level.
The EAP salary level and HCE total annual compensation level would be automatically updated every three years.
Read this FAQ for more information.
Note: The amounts proposed by the DOL are based on current earnings data. Final rule amounts might be higher.
Other significant changes under the proposed rule include the following:
- In the rules that were effective on Jan. 1, 2020, Puerto Rico, Virgin Islands, Guam and Commonwealth of the Northern Mariana Islands were not included in the previous salary amount increase and the levels in place previous to 2020 ($455 per week, $23,660 annually) remain in place. The proposed rules would implement the increased amounts ($1,059 per week, $55,068 annually) for all of these jurisdictions.
- In American Samoa, the DOL proposes to set a special salary level of $890 per week ($46,280 annually). However, as American Samoa is scheduled to increase its minimum wage rates until they equal the federal minimum wage, it is further proposed that 90 days after the highest industry minimum wage for American Samoa equals the federal minimum wage, the full standard salary level in the proposed rule would apply for all employees in all industries in American Samoa.
- The current regulations permit employers to exempt employees in the motion picture industry who are paid a specified base rate per week (or a proportionate amount based on the number of days worked), so long as they meet the duties test for the EAP exemption. Consistent with its practice in recent rulemakings, the DOL proposes to increase the required base rate in proportion to the proposed increase in the standard salary level test, resulting in a proposed base rate of $1,617 per week (or a proportionate amount based on the number of days worked).
Steps to consider now
For the proposed rule, while there is no action required at this time, here are some steps you might want to consider.
Review the proposal.
Ensure that your "exempt" employees are properly classified under existing rules.
Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.
Evaluate potential costs.
If the rule becomes final and your exempt employees fall below the new salary threshold, you would generally have two options: (1) reclassify the employees as nonexempt and pay them overtime whenever they work more than 40 hours in a workweek; or (2) raise their salary to meet the new requirement.
Consider state rules.
Some states have their own rules on overtime exemptions. Generally, if state law is more protective (i.e., requires a higher salary amount or has duties tests that are more difficult to satisfy), then state law must be followed. Currently, only a few states (California, New York, and Washington) have minimum salary requirements for exemption that exceed the 2023 proposed rule federal minimum for one or more of the exemptions. More states could join the list in the future.
Keep in mind that state rules may prohibit employers from using bonuses to satisfy part of the salary requirement. Therefore, to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Check your state law to ensure compliance.
Watch for updates.
We will be monitoring the status of the proposed rule closely and updating this page as developments unfold.