The default under the federal Fair Labor Standards Act (FLSA) is for all employees to be non-exempt and entitled to overtime. But if an employee meets each of the following three tests, their position will be deemed exempt from the requirement to pay overtime:
- The Salary Basis Test: The employee must be paid a salary that does not vary from pay period to pay period based on the quantity or the quality of their work.
- The Salary Level Test: The employee must be paid a minimum salary of $684 per week ($35,568 per year).
- The Duties Tests: The employee must perform exempt duties.
On December 10, 2021, the White House and the Department of Labor confirmed that they plan to propose new rules to increase the salary level required to qualify for exempt status under the FLSA. The rationale for increasing the salary level is that it serves as a proxy. Employees paid less than the threshold, regardless of their title, probably are not executives or white-collar professionals. Of course, raising the salary level to qualify as exempt means that more workers will be entitled to overtime.
In 2016, the Obama Administration raised the salary threshold from $23,660 annually to $47,476 per year with automatic increases every three years based on the cost-of-living increase. Employers were permitted to apply nondiscretionary bonuses to satisfy 10% of the salary level. However, in 2017, this increase was held invalid by the U.S. District Court for the Eastern District of Texas and never took effect. In 2019, the Trump Administration adjusted the $23,660 threshold for inflation, which resulted in the current threshold of $35,568 annually, or $684 per week. The DOL kept the Obama Administration’s option to satisfy up to 10% of the salary level with nondiscretionary bonuses. No litigation resulted. This is where we stand today.
Some legal analysts expect that the salary level will be increased for inflation only. Others expect it to be higher. Indeed, Senator Sherrod Brown, of Ohio, has proposed that the salary level threshold be increased to $87,732 by 2026, but it’s unlikely that the DOL will be that aggressive. As history has demonstrated, if the increase is too aggressive, it is likely that litigation will result and the administration will end up with no increase at all.
The administration has held a series of listening sessions for stakeholders across the country to receive input on the appropriate salary level for exemption and the costs and benefits of increasing the salary level to employers and employees. Based on these listening sessions, the DOL will need to propose new rules, provide an opportunity for notice and comment, and publish a final rule. It could take months before we know whether a final rule will be forthcoming.
Remember, individual states may have more restrictive requirements for an employee to be classified as exempt. For example, Colorado’s 2022 exempt salary level threshold is $45,000 annually, which will increase to $50,000 in 2023. Therefore, it is important to check your state’s salary threshold requirements before relying on the federal rule.
If you have a question or a concern about this issue, email the Employers Council Member Experience team.