In general, under the Fair Labor Standards Act (FLSA), a person must satisfy three criteria to qualify as exempt from federal overtime pay requirements: first, they must make a salary; second, that salary must be more than $684/week ($35,568 annually); and third, their “primary duty” must be consistent with those common to executive, administrative, or professional positions.

On August 30, DOL released its notice of proposed rulemaking (NPRM) altering the overtime pay regulations under the FLSA. The proposal makes significant changes to the regulations governing who qualifies for the “executive, administrative, and professional” (EAP) – or “white collar” – exemption. The workers who qualify for the white collar exemption are ineligible for overtime pay for any hours over 40 worked in a given workweek. The rule:

• Increases the minimum salary threshold to $55,068, or the 35^th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South), which represents a nearly 55% increase from the current threshold of $35,568;
• Increases the highly compensated employee (HCE) total annual compensation threshold to $143,988, or the 85^th percentile of weekly earnings for full-time salaried workers nationally, which represents a 34% increase from the current $107,432;
• Automatically updates both thresholds every three years by tying them to their respective percentiles of weekly earnings; and
• Applies the minimum salary threshold to the U.S. 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 – and raises the special salary threshold for employees in American Samoa to $890 per week, or 84% of the proposed minimum salary threshold.

The threshold increases are significant and will impose massive increases in labor costs for employers. This will be especially problematic for small businesses and for organizations operating on fixed budgets, such as public employers and non-profits, forcing them to cut critical programming, staffing, and services. Many employers will be forced to reclassify employees from salaried to hourly workers, resulting in reduced career advancement opportunities and flexibility in the workplace. These changes will lead to low employee morale and productivity, hurting businesses even further. The American people will see more increases in prices for goods and services as well as diminished customer service.

Automatic updates, moreover, will mean DOL will increase the threshold regardless of the economic circumstances at the time. This will inevitably exacerbate any economic problems, like today’s supply chain disruptions, worker shortages, and high inflation. Forced increases in labor costs at economically vulnerable times will have dangerous consequences.

Importantly, the last update to the overtime regulations was completed only four years ago, when the Trump administration proposed a reasonable increase to the minimum salary threshold. The Trump-era DOL was forced to act after the Obama administration had proposed and finalized a dramatic and unprecedented increase to the threshold in May 2016. The Obama administration tried to implement an increase of over 100%, from $23,660 per year to $47,476. That increase was so out of line with past increases and the intent of the FLSA that a federal judge invalidated the rule.

Proof of the negative impact of drastic changes to the overtime regulations can be seen in the sheer number and variety of organizations and industries that submitted comments to DOL on the Obama-era rulemaking. PPWO itself is composed of a range of industries representing private sector businesses, nonprofit organizations, higher education institutions, and state and local public entities. It’s clear that a radical change to the overtime regulations would negatively impact every aspect of the economy.

DOL should heed the regulated community’s warnings about this new proposed rulemaking. The Biden administration should abandon or at least postpone their rulemaking until the current economic situation stabilizes and improves.