On January 10, 2024, The Department of Labor published its final rulemaking altering the criteria for determining worker status as an independent contractor or employee under the Fair Labor Standard Act (FLSA). The final rule applies a multifactor test, where six different factors are considered holistically and could be determinative of a worker’s classification. This is a shift from the 2021 rule which identified two “core” factors that guided worker classification determinations: the nature and degree of the worker’s control over the work; and the worker’s opportunity for profit or loss. The final rule will go into effect on March 11, 2024.
“We’re disappointed DOL has finalized this rulemaking despite repeated requests from independent contractors, small businesses, and the regulated community to continue classification under the 2021 rule’s methodology,” said Josh Ulman, spokesman for the Partnership to Protect Workplace Opportunity. “The new multifactor test will just make it more difficult for workers to be classified as independent contractors.”
“The DOL is taking autonomy away from workers who prefer the flexibility and independence of independent contractor work arrangements. The majority of independent contractors including women, older Americans, and entrepreneurs would rather work independently than as traditional employees because it allows them to work around home conflicts, health issues, and other jobs. Reclassifying these workers would take away valuable employment opportunities.”
“This rulemaking will lead to a decline in employment. It will reduce opportunities for independent contractors, limit access to affordable project-based labor, and put small businesses reliant on contractors out of business.”
Today, the Partnership to Protect Workplace Opportunity (PPWO) and 244 national, state, and local organizations representing employers from a wide range of private industry and public, nonprofit and education sectors filed comments urging the U.S. Department of Labor (DOL or “Department”) to abandon the agency’s proposed 69 percent increase to the minimum salary an employee must receive to qualify as a “white collar” employee exempt from federal overtime pay requirements under the Fair Labor Standards Act (FLSA). While the Biden Administration announced in December of 2021 that it was contemplating an increase to the minimum salary for white collar exemptions, the Department did not announce the proposed salary level until September 8 of this year, when the agency issued a Notice of Proposed Rulemaking that proposes an increase from the current minimum of $35,568 annually, which was set in 2019, to a projected minimum of $60,209 annually. The Department has based the proposal on a formula that sets the proposed minimum to the 35th percentile of earnings for all full-time salaried workers in the lowest-wage Census Region at the time the final rule is published. The Department has also proposed automatically increasing the minimum salary every 3 years by pegging it to the 35th percentile formula.
The Department only provided the public with 60 days to comment on the proposed rule, even though hundreds of stakeholders asked the Department for more time to comment. In addition, the Department’s proposal would only allow employers 60 days to implement the changes following release of a final rule, even though by the agency’s own estimate, 3.6 million workers who are currently exempt white collar workers make less than $60,209. For each of these 3.6 million workers, employers will need to determine whether to raise an employee’s salary to meet the new threshold, reclassify them as hourly, or restructure the job or department and distribute work differently, which may result in reductions in force. Oxford Economics, which evaluated the rule on behalf of the National Retail Federation, estimates far more workers–as many as 7.2 million–would be impacted by the Department’s proposed increase. Based on the Department’s timetables, PPWO estimates DOL could issue the final rule as early as March 1, 2024, and employers would need to implement the changes as early as May 1, 2024.
Top line issues raised in PPWO’s Comments:
Employees Will Have Fewer Opportunities for Flexible and Remote Work and Career Development The Department’s proposed rapid increase to the minimum salary level would result in the vast majority of impacted employees being reclassified as “hourly” or “non-exempt” employees. According to the Department’s own estimate, 3.6 million currently exempt workers make less than the proposed minimum. This number will expand exponentially over the years if the Department implements its proposed automatic updates. Reclassification has many negative ramifications for employees. “Hourly” or “nonexempt” employees must be paid for each hour worked and, for all hours worked over 40 in a given workweek, at a rate of one and a half times an employee’s regular pay rate (this premium pay rate is known as “overtime pay”). To ensure employees are paid for all hours worked and at the proper rate for overtime, employers must carefully track the hours nonexempt employees work. As a result, employers will necessarily avoid situations where tracking nonexempt employees’ hours is difficult or impossible so as not to accidentally violate the FLSA and face significant per-employee liability. This means hourly employees have fewer opportunities to work flexibly and remotely. They also have fewer opportunities for workforce development, such as participating in training, seminars, or conferences that occur outside normal business hours.
Employees Will Have Fewer Opportunities for Part-Time Work In addition, the regulations do not allow for pro-rating the salary threshold, so far fewer employees would be eligible for part-time exempt positions. For example, a part-time employee working a 50 percent schedule can now qualify as exempt so long as they work in a position that has a full-time salary of approximately $72,000 per year. This is true not because the full-time equivalent salary is $72,000, but because the half-time salary of $36,000 is still in excess of the regulatory minimum. Instead, in the first year under the Department’s proposal, an employee working a 50 percent schedule would need to be working in a position earning more than $120,500 on a full-time basis.
Most Employees Will Not Receive Additional Compensation, and Some Employees May See a Reduction in Pay While hourly employees are eligible for overtime pay, employers will schedule work in a manner to avoid the premium and unpredictable costs of having employees work overtime. As a result, employees may work less and get paid less. In addition, when employees are converted to non-exempt status, they often find that they have lost their ability to earn incentive pay. Under existing rules for calculating overtime rates for hourly workers, many incentive payments must be included in a non-exempt employee’s “regular rate” (i.e., the base rate for overtime) of pay. Faced with the difficult calculation (and recalculation) of these overtime rates—sometimes looking back over every pay period in a year—employers often simply forgo these types of incentive payments to nonexempt employees rather than attempt to perform the required calculations.
Businesses, Nonprofits, Schools, Local Governments and Workers in Rural and other Low-Cost Areas Will be Hit the Hardest The Department’s dramatic increase will impact rural and lower-cost regions the most. For example, in ten job categories in which the Department assumes employees are highly likely (90 to 100 percent) to pass the duties test, between 24 and 40 percent of them on a national basis will fail to meet the Proposed Rule’s increased salary threshold. With respect to employees in the South and Midwest Census regions, that range increases to 28 to 48 percent—almost half. And with respect to employees working in the South and Midwest regions outside large metro areas, somewhere between 34 and 70 percent of workers will fail to meet the increased salary threshold. This effective elimination of the exemption for certain low-cost-of-living areas of the country makes clear that the Department is once again exceeding its statutory authority. Congress directed the Department to define and delimit the terms in the statute; it cannot possibly have meant that the Department should effectively eliminate the exemption in certain regions.
The Department’s Proposed Rule Is Unlikely to Withstand Judicial Scrutiny In 2016, the Department promulgated a final rule (the “2016 Final Rule”) which pegged the white- collar exemption threshold to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census Region (the South). The 2016 Final Rule was challenged in the U.S. District Court for the Eastern District of Texas. The court found that “Congress did not intend salary to categorically exclude an employee with executive, administrative, or professional capacity duties from the exemption” and permanently enjoined the 2016 Final Rule on September 1, 2017.
On October 24, 2023 PPWO and 87 organizations representing private, public, nonprofit, and educational entities sent letters to House and Senate lawmakers requesting that they urge the Department of Labor’s Wage and Hour Division to withdraw its proposed overtime pay regulations. The Department has proposed to increase the minimum salary level that an employee must receive to be exempt from federal overtime pay by an overwhelming 70 percent and has additionally proposed to automatically increase the salary level every three years. This proposal comes despite the Department updating the minimum salary level just four years ago in 2019, and the new proposed salary level is effectively 154 percent higher than the threshold that was in place prior to that 2019 update.
On May 25, 2023, the Partnership to Protect Workplace Opportunity and 104 employer organizations that represent a wide range of stakeholders from the private, public, and education sectors sent a letter to DOL urging the agency to abandon or at least postpone issuance of its anticipated proposed rulemaking altering the overtime regulations under the FLSA.
As we explain in the letter, “Even though the COVID-19 public health emergency has been lifted, concerns with supply chain disruptions, workforce shortages, inflationary pressures, and the shifting dynamics of the American workforce persist, and any rule change now would threaten a particularly vulnerable and recovering economy.”
On May 11, 2022, PPWO and 93 organizations sent a letter to Secretary of Labor Marty Walsh urging him to abandon or at least postpone issuance of the Department of Labor’s announced proposed rulemaking altering the overtime regulations under the Fair Labor Standards Act (FLSA).
Over the past two months, the employer community has warned DOL during its listening sessions that “the economy today cannot support changes to the white-collar exemptions under the FLSA.” “Due to significant concerns with supply chain disruptions, workforce shortages, inflationary pressures, and the shifting dynamics of the American workforce following the COVID-19 pandemic, any rule change now would be ill-advised. Importantly, DOL last updated the overtime regulations only three years ago, which strongly suggests there is no need for urgency in issuing more changes.”
PPWO called on DOL to abandon or at least postpone issuance of its announced NPRM “until the current economic situation stabilizes and improves to allow the American workforce, employer community, and DOL itself to more fully understand how the pandemic has shifted the paradigm of work in America.”
On January 25, 2022, 110 employer organizations sent a letter to Secretary of Labor Marty Walsh urging the Department of Labor (DOL) to hold stakeholder meetings prior to the development and issuance of its anticipated proposed rulemaking on the “white collar” exemptions to the overtime regulations under the Fair Labor Standards Act.
In the letter the organizations explain, “This will be a significant rulemaking with respect to cost, difficulty in implementation and impact on the workforce, particularly given the current acute labor shortages. Our organizations urge DOL to follow past precedents and hold meetings with the regulated community to obtain input on the potential impact of any changes to the overtime exemption requirements.”
DOL would benefit from stakeholder input on the current economic situation and the potential impact new overtime regulations could have on the workforce and economy. Past administrations have held such meetings, and the employer organizations strongly urge the Biden DOL to follow suit. Given the vast increases in remote work and concerns around historic increases in inflation, it is particularly important for DOL to gather input before issuing a proposed regulation.
On December 10, the Department of Labor announced it is planning to issue a new overtime regulation to raise the minimum salary threshold under which all employees must be paid overtime. DOL has not publicized a specific figure yet. We also believe the administration is considering altering the duties test, or the test used to determine if a worker’s specific job responsibilities make them ineligible for overtime pay.
The overtime regulations under the Fair Labor Standards Act have been updated several times over the last few years. The Obama administration wanted to raise the salary threshold to over $50,000 per year, an increase of over 100%. They were forced to lower the figure to $47,476 in their final rule, but this figure still put the economy and workers’ wellbeing in jeopardy. While the Trump administration was able to right the ship and bring the threshold down to a more reasonable $35,568 per year, we expect the Biden administration to “go big” in their proposal.
PPWO will file comments on the upcoming proposal to ensure reasonable, responsible regulations are put in place.
On March 25, 2021, a small group of Democrats in Congress called on the Biden administration to increase the minimum salary threshold, under which employees must be paid overtime, to at least $82,732 by 2026. This would be an increase of over 100% over the current level of just over $35,000. This increase would have devastating consequences for the economy, especially given the current economic environment caused by the COVID-19 pandemic.
PPWO strongly urges the Biden administration to reject this unreasonable and dangerous recommendation.
This is still a 99% increase. A token reduction will not alleviate the harm this rule will do to nonprofits, colleges, and small businesses and their employees. Moreover, the salary threshold must take into account regional differences in cost of living, which the current Labor Department approach does not. We’re encouraged by reports that the Labor Department is beginning to listen to the outcry from the nonprofit, higher education, and small business communities, but this rule needs a comprehensive reevaluation before it is released, else we risk doing serious damage to precisely the organizations and workers we all want to thrive,” said Lisa Horn, spokeswoman for the Partnership to Protect Workplace Opportunity (PPWO), a coalition of more than 70 organizations representing the broad employer community.
On September 15, NPR published an article discussing the consequences of the Department of Labor’s overtime proposal. The article explores how businesses across the country see this proposal as more harmful to their employees than helpful. Workers will lose income, flexibility, status in the workplace, and potentially even their job. You can read the article here.