U.S. Department of Labor Proposes Rule Increasing Salary Threshold for Exempt Workers
September 7, 2023
By: Colin A. Walker
On August 30, 2023, the U.S. Department of Labor proposed a rule which would increase the federal salary threshold for exempt workers from $35,568 to $55,068 annually. The law will not become effective until and unless it proceeds through the federal rulemaking process. However, the proposed rule is the first step in that process.
For many years, the Fair Labor Standards Act (FLSA) and accompanying Department of Labor regulations have required that, unless an employee is “exempt,” the employee must be paid according to the federal minimum wage and overtime laws. Usually, this means hourly pay, plus time-and-a-half for all hours worked over 40 in a workweek. Often, overtime is a substantial expense for employers and employers are often incentivized to find ways to classify employees as exempt.
In order to be exempt, an employee must pass a “duties” test to qualify for a specific exemption, such as the executive, administrative, and learned professional exemptions (there are several other exemptions). Each has its own multi-factored test regarding the duties performed by the employee, which should be carefully analyzed.
An exempt employee must also be paid by salary (a pre-determined amount of compensation regardless of the amount or quality of work) over a certain threshold. The salary threshold has changed over the years to account for inflation and other factors. Prior to 2016, the salary threshold was $26,660 per year, which, in recent years, most agreed was unreasonably low. In 2016, the Department of Labor under the Obama Administration proposed increasing it to $47,476, which many thought was unreasonably high. Several lawsuits followed and a federal court in Texas issued an injunction prohibiting enforcement of the new threshold pending the court’s final decision. In the meantime, Donald Trump was elected and the Department of Labor under his leadership had a decidedly different view. However, the new Department of Labor agreed that the $26,660 threshold was too low and increased the threshold to $35,568. That threshold has been in effect ever since.
The rule proposed on August 30, 2023 would increase the threshold to $55,068 annually. This will be a big adjustment for many employers. Employers will have the option of increasing the compensation of exempt employees to $55,068 or paying them hourly with overtime for all hours worked over 40 in a workweek. In doing so, employers will have to evaluate a number of different considerations, such as the likelihood that employees will work overtime, the difficulty in tracking worktime (which has become more and more difficult as employees work remotely and outside normal working hours), and the incremental cost of complying with the new salary threshold. In addition, ironically, many workers prefer to be paid by salary even in cases where being classified as non-exempt would result in more compensation, citing the inconvenience of recording working time and the perceived prestige of being paid by salary.
The new rule would not change many state’s laws, which are sometimes different from federal law. Under federal law, a state may adopt a higher salary threshold but not a lower one. Many states’ laws track the federal salary threshold. Others, however, adopt a higher threshold. Colorado, for instance, tracked the federal threshold until 2021, at which time it set the salary threshold at $40,500, almost $5,000 above the federal threshold at that time. The Colorado threshold for 2023 is $50,000 and will increase to $55,000 in 2024. Thus, Colorado employers will not be impacted as dramatically as employers in many other states, but they will still be faced with the decision of whether to increase the exempt employee’s salaries to comply with the federal threshold or re-classify some employees as non-exempt, subject to overtime pay requirements. In states with lower salary thresholds, this could be a difficult decision.
The new law would not affect the duties tests. Employers will still have to ensure that the duties of their exempt employees comply with one or more of the specified exemptions, which is often complicated and uncertain.
The risks of misclassifying employees as exempt can be significant. The U.S. and state Departments of Labor frequently audit employers’ pay practices. If they find violations, they will typically require the employer to correct the practices going back two years. If the violations are found to be willful, harsh sanctions can be imposed. In addition, employers who violate these laws are subject to lawsuits by aggrieved employees, which could include actual damages, liquidated damages, penalties, and attorneys’ fees, and these are often filed as class actions. When a large number of employees are involved, the consequences of violations can be crippling and even individual claims can be very expensive. Employers should carefully follow developments in the salary requirements for exempt employees and ensure that they are in compliance.