HR REPORT: Proposed Increase to Minimum Guaranteed Salary for “White Collar” Overtime Exemption

The federal Fair Labor Standards Act (FLSA) requires covered employers, including municipalities, to pay most employees at least minimum wage for every hour worked and overtime equal to 1 ½ times the employee’s regular rate of pay for all hours worked over 40 in a work week (or over 53 hours for fire protection employees and 43 hours for law enforcement employees).  However, it provides a limited set of exemptions to these minimum standards for certain qualifying employees, referred to as “exempt” employees.  The most commonly utilized set of exemptions are referred to as the “white collar” exemptions, which, generally, permit employers to exclude salaried executives, administrative, and professional employees from their overtime policies.  

In general, in order to properly classify an employee as an exempt executive, administrative, or professional, the employer must evaluate whether the employee (1) performs exempt duties, (2) is paid a guaranteed salary basis, and (3) the salary meets the minimum threshold.  The current salary threshold is $684 per week ($35,568 annually).  The FLSA regulations also provide a streamlined exemption test for highly-compensated employees, i.e., employees who (under the current rule) receive at least $107,432 in total annual compensation, a component of which much be a guaranteed a minimum base salary.

On Aug. 30, 2023, the U.S. Department of Labor, the agency responsible for overseeing and implementing the Fair Labor Standards Act, announced a proposed rule to raise the minimum salary required to qualify for the “white collar” exemptions to $1,059 per week ($55,068 annually), and to increase the highly compensated employee exemption to $143,988 per year.  The proposed rule also includes automatic updates, bumping up the threshold to account for inflation every three years.

It is important to note that not all salary exempt employees will be impacted by the new proposed rule.  For example, a limited number of professions (generally, teachers, lawyers, and doctors) qualify as exempt under the “learned professional” exemption, so long as they otherwise meet the applicable test, regardless of whether they are paid the minimum salary required for other white collar exemptions. 

The public comment period on the proposed rule closed on November 7, 2023.  The DOL has not yet issued a modified proposed rule or a final rule in response to the comments.  If finalized, implementation will likely begin at some point in 2024.  That being said, legal challenges are anticipated once the rule is finalized which could further delay implementation of the proposed changes.

Given that this is a proposed rule which has not yet been finalized, no immediate action is required by employers.  However, this would a good time to evaluate how, if implemented, the minimum salary adjustment would impact municipal employees.  For example, municipal human resources departments should audit current classifications to see how many exempt employees currently earn less than the new proposed minimum annual salary of $55,068 and assess what it would cost to increase their pay (taking into account associated raises for other employees due to compression impacts) versus the cost of reclassifying the position as non-exempt and overtime eligible.  Additionally, the proposed rule may provide a good reason to perform a broader classification audit and assess whether all employees classified as exempt truly perform exempt duties. 

Many municipal employers have unionized employees, whose wages are subject to a collective bargaining agreement (CBA).  To the extent that any provision of a CBA is in conflict with the new rules updating the minimum salary amount, the revised legal rules will take precedence.  For example, a clause in a CBA stipulating that certain employees earning $50,000 per year are classified as salary-exempt and not eligible for overtime would conflict with the new proposed rule once it takes effect.  Any such employees would be entitled to overtime for all hours worked over 40 in a work week, which would require tracking of hours, closer management of hours worked per week, and payment of overtime as necessary.  Any proposal to modify salary amounts to maintain exempt status would require bargaining with the Union.

In anticipation of the new rules taking effect in 2024, now is the time for human resources professionals to review employee rosters and CBAs to identify which employees may be impacted by the new rules.  With advance planning, municipal employers can be well positioned to bring themselves into compliance with the new rules upon their inception.

This is not a legal document nor is it intended to serve as legal advice or a legal opinion.  Drummond Woodsum & MacMahon, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.