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.