The U.S. Department of Labor (DOL) recently unveiled a proposed rule that could bring sweeping changes to overtime eligibility for millions of American workers. If finalized, the rule would expand overtime protections to an estimated 3.6 million additional employees. Employers across various sectors—from small businesses to large corporations—must prepare for the potential operational and financial ramifications.
Fundamental Changes in the Proposed Rule
The rule proposes significant adjustments to the Fair Labor Standards Act (FLSA), mainly by elevating the salary thresholds for white-collar and highly compensated employee exemptions. Specifically, the salary level for white-collar exemptions would increase from $35,568 to $55,068 annually, while the threshold for highly compensated employees would rise from $107,432 to $143,988 per annum. Additionally, the rule suggests automatic 3-year updates to these thresholds.
Financial Implications for Employers
The heightened thresholds would invariably escalate labor costs for employers. Those employing workers whose salaries fall between the current and proposed new threshold will face a dilemma: either increase wages to surpass the new threshold or reclassify those workers as non-exempt and pay them overtime.
The rule is expected to disproportionately affect sectors like hospitality, retail, health care, and small and midsize businesses. Employers outside large metropolitan areas may also feel the weight of the new regulation more keenly.
Legal Considerations and Uncertainties
Given the previous unsuccessful attempt to implement a similar rule in 2016, which faced legal challenges, employers should proceed cautiously. While preparing for the new changes is essential, there’s also a need to remain agile, as the final rule is likely to be contested in court.
The Importance of Duties Tests
The proposed rule does not change the ‘duties test,’ meaning employees must still perform specific types of work to qualify for the white-collar exemption. Salary is not the sole criterion; the nature of the work is equally crucial.
Employers must also pay attention to state regulations, as some states like California, Colorado, Maine, New York, and Washington have higher salary thresholds for overtime exemptions. Failure to comply with both state and federal laws could result in penalties.
While the DOL’s proposed rule promises to expand overtime protections to millions, it also introduces a layer of complexity for employers. It is crucial for companies to assess the potential impact on their labor costs, employee morale, and operational procedures and to prepare contingency plans for legal uncertainties. As we await the final rule and any ensuing legal challenges, employers should start preparing their strategies for compliance and workforce management.
The public comment period for the proposed overtime rule is open until November 7, 2023.