Questions Remain About Anticipated Proposed Overtime Rule

​This spring, employers are expecting to learn about the U.S. Department of Labor's (DOL's) proposed changes to the overtime rule. It's anyone's guess how high the DOL may want to raise the salary level threshold for the white-collar exemptions to the rule, but it could be quite high.

The reason for delays in releasing the proposed rule is unclear, as well. Some think it might be an indication that changes to the duties tests for exemptions under the Fair Labor Standards Act (FLSA) will be recommended.

The rule update was first announced in spring 2022. The most recent regulatory agenda then stated the proposed rule will be released in May. The department is not required to release the proposed rule by then, however, and regulatory agenda projections for the release of rules are often missed.

"With inflation being what it is, and so many states having minimum hourly wage rates that far exceed the FLSA rate, I think it is likely we will see some aggressive increases proposed by the Biden DOL," said Jim Coleman, an attorney with Constangy, Brooks, Smith & Prophete in Fairfax, Va.

That would result in significantly more workers qualifying to earn overtime pay, noted Jeff Ruzal, an attorney with Epstein Becker Green in New York City.

The current threshold is $684 per week, which equates to $35,568 annually.

In 2016, the Obama administration tried to raise the threshold to $913 per week—$47,476 annually—and institute automatic adjustments every three years, but a federal judge blocked the rule, declaring it unlawful.

Will Changes to the Duties Tests Be Proposed?

It's possible the DOL will also expand the duties tests, which might make it more difficult for employers to classify certain employees as exempt without modifying their job functions, said LaKeisha Caton, an attorney with Pryor Cashman in New York City.

For a white-collar exemption to apply, an employee must satisfy the applicable job duties test, be paid at or above the applicable minimum salary and be paid on a salary basis. There are separate duties tests for each white-collar exemption:

Executive exemption. The employee's primary duty must be managing the enterprise or a department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers—or the employee's suggestions and recommendations as to hiring, firing or changing the status of other employees must be given particular weight. 

Administrative exemption. The employee's primary duty must be performing office or nonmanual work that is directly related to the management or general business operations of the employer or the employer's customers. The employee's primary duty also must include the exercise of discretion and independent judgment with respect to matters of significance.

Professional exemption. The employee's primary duty must be to perform work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction and study.

A commonly discussed change is adopting tests used in California under which exempt employees must exclusively perform clearly exempt duties more than 50 percent of the time each workweek, said Rob Boonin, an attorney with Dykema in Ann Arbor, Mich. If this change were made, employers would have to decide whether to switch the duties their exempt employees perform so that they retain their exempt status, pay those who may lose their exempt status overtime for all hours worked over 40 in a workweek or prohibit those losing their exempt status from working more than 40 hours in a workweek. Nonexempt employees who work more than 40 hours even though they are prohibited from doing so would have to be paid overtime but could be disciplined.

It's unclear if the DOL will expand the outside sales exemption to apply to employees who perform sales virtually, said Charles McDonald III, an attorney with Ogletree Deakins in Greenville, S.C. Such a change would recognize the technology available to salespeople that makes spending time out of the office visiting customers less critical, he said. Most likely, the DOL will maintain the current outside sales exemption, he stated, calling the exemption out-of-date.

Boonin said a significant change to the duties tests would be subject to legal challenges based on the "major questions" doctrine, which bars regulatory changes of vast economic and political significance when not clearly authorized by Congress.

How Big Might an Increase in the Salary Level Threshold Be?

McDonald expected the DOL would increase the minimum salary by $10,000 to $15,000 per year.

"We would expect challenges potentially from the hospitality industry and other trade associations if the proposed minimum salary is increased as high as $49,000," he said. "If the proposed increase is minimal, like to $40,000, then court challenges may be less likely."

It's possible the proposed rule will include increases to the exempt salary threshold based on the consumer price index, Caton said.

"This might be problematic because those who oppose the rule could challenge it on the basis that the exempt salary threshold can only be increased pursuant to the normal rulemaking process, not automatically based on changes in the market," she said.

Why the Delays in Issuing the Proposed Rule?

The delays in issuing the proposed rule likely have been due to other DOL agenda items that have taken precedence over changes to the overtime exemption rules, McDonald said. The DOL's emphasis on classifying many workers as employees rather than independent contractors has been a recent priority.

The delays also may indicate that the proposed rule will "be more comprehensive than just a one-time increase of the threshold," Caton said. In addition, the DOL may be taking time responding to stakeholder listening sessions on the overtime rulemaking.

Absent a successful court challenge, employers should be prepared once a new rule is finalized to make difficult decisions about whether to raise salaries to maintain exempt classifications or reclassify exempt employees to nonexempt status and pay overtime under the FLSA, Coleman said.