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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.