Right now, employees must earn at least $684 each week ($35,568 annually) before they may be exempt from overtime. But you may have noticed headlines saying that the U.S. Department of Labor (US DOL) is raising the minimum salary for overtime exemption to $1,059 per week ($55,068 per year) – an increase of almost $20,000! Can that be true? Indeed, it is. US DOL proposed this change, and several others, to the Fair Labor Standards Act (FLSA) overtime regulations on August 30, 2023. To learn more about what the changes could mean for local government employers and employees, read on.

BACKGROUND

Since 1938, the FLSA has required employers to pay employees at a premium rate of one-and-one-half times their regular rate of pay for every hour over 40 that they work in a workweek. Certain employees are exempt from the overtime requirement. Since 2019 – the last time DOL revised the overtime regulations – the exemption requirements have been set out this way:

1. the position must be paid on a salary basis ( “salary basis test”);
2. the position must be paid a minimum of $684 per week ($35,568 annually) (“salary threshold test”); and
3. the position’s duties must satisfy either the executive, administrative or professional duties test.

I have discussed these requirements in previous blog posts. Read about the salary basis test here, the executive duties test here, the administrative duties test here and here, and the professional duties test here and here.

Under the salary threshold test, an employee paid less than $684 each week cannot be exempt from earning premium overtime pay. Over the years, the threshold level has gone up, but it has never been subject to regular updates. Before the 2019 update to the salary threshold (which became effective January 1, 2020), the last increase had been in 2004. Before 2004, the last previous update to the salary threshold was in 1975. Without regular updates, the salary threshold test cannot to its job of pointing to employees who are likely to meet the duties tests and should be exempt from overtime. With such infrequent updates, when US DOL has raised the salary threshold, the increases have been large – large enough, as here, to make some employers gasp. After all, large increases mean that a greater number of employees who were exempt must now be paid overtime.

When US DOL issued the 2019 rule, which raised the salary threshold from $455 per week to the current $684 per week, it promised to update the salary threshold on a more regular basis. This new proposed increase may be seen as its attempt to make good on that promise.

THE PROPOSED NEW REGULATIONS

The proposed new regulations would make three changes to the FLSA regulations as they now stand:

1. as discussed above, they would raise the minimum salary that an employee must earn each week to be exempt from overtime from $684 to $1,059;
2. they would also raise the total annual compensation that a highly compensated employee (that is, an employee paid enough that they can be exempt without meeting a duties test) must earn to be exempt from overtime from $107,432 to $143,988; and
3. they would include an automatic mechanism for updating the salary thresholds every three years.

Let’s discuss each change in turn.

Minimum Weekly Salary of $1,059

Remember first that the salary threshold is a minimum weekly salary. It is not really correct to say that the salary threshold is $55,068 per year because an employee who earns $55,068 per year but has earned less than $1,059 for some workweeks and more than $1,059 on others will not pass the salary threshold test. The employee must earn $1,059 each and every week.

Why $1,059 and Not Some Other Number?

You might wonder why US DOL chose $1,059 as the salary threshold (and why it didn’t choose a more even number like $1,000 or at least $1,060). The amount $1,059 represents the 35^th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region – currently, the South. Having decided on this methodology to fix the amount of the salary threshold, US DOL hasn’t rounded up or down; it has stuck with the exact number. It is beyond the scope of this blog post to discuss the ways in which US DOL has changed its methodology for fixing the salary threshold over the years. You can find discussion of that in the preamble discussion to the proposed regulation at 88 Fed.Reg. 62152, 62160 or on pp. 2-9 of my book A Comprehensive Guide to the Fair Labor Standards Act for Public Employers. Suffice it to say here that US DOL’s goal has always been twofold: 1) to choose a salary threshold number that roughly distinguishes between those who are likely to meet one of the duties tests for overtime exemption and those who will not, and 2) to exclude from the overtime exemption lower-paid white collar workers who perform a significant number of nonexempt tasks.

Inclusion of Nondiscretionary Bonuses Continued

Note that the proposed new regulations continue to allow up to 10 percent of the minimum salary to be satisfied by the inclusion of nondiscretionary bonuses and incentives as provided by 29 CFR § 541.602(a)(3). See pp. 8 – 9 of A Comprehensive Guide for an in-depth explanation.

Highly Compensated Employee Salary Threshold

The FLSA regulations allow an exemption from overtime for highly compensated employees whose job duties do not fully satisfy any of the duties tests for exemption. Such an employee will be exempt if they perform office or nonmanual work and customarily and regularly perform at least one of the duties from the executive, administrative or professional duties tests. See here. Currently, the FLSA regulations define a highly compensated employee as one who makes a minimum of $107,432 per year (this exemption is measured on an annual, rather than a weekly basis). The proposed regulations would raise that amount to $143,988. The number represents annual salary of the 85^th percentile of full-time salaried workers nationally.

The Computer Professional Exemption

The computer professional exemption is a subcategory of the professional exemption, but it really stands on its own. Under it (which I discuss in detail here), an employee who is paid at a minimum rate of $27.63 per hour  — either on a salary basis or on an hourly basis – and who satisfies the computer professional duties test (see here) is exempt from overtime. US DOL will not raise the minimum hourly rate of this exemption because Congress has set the rate in the text of the FLSA itself.

Automatic Updating of the Salary Thresholds

The proposed new regulations would add a new section § 541.607 to Title 29 of the Code of Federal Regulations (CFR) that provides for the automatic updating every three years of the salary threshold test and the highly compensated employee salary threshold. The automatic update will standardize the salary threshold test at the 35^th percentile of weekly earnings of full-time non-hourly workers in the lowest wage Census Region, and the highly compensated employee threshold at the 85^th percentile of full-time non-hourly workers nationally. US DOL would publish the updated standard salary level and highly compensated employee salary threshold in the Federal Register and on its website at least 150 days before the update would be effective.

The proposed regulation also allows US DOL to delay temporarily a scheduled update when unforeseen economic or other conditions (such as a pandemic) warrant.

NO CHANGES TO THE DUTIES TESTS

The proposed new regulations make no changes to the any of the executive, administrative, professional or computer professional duties tests.

WHEN WILL THE UPDATED RULE BECOME FINAL?

The process of federal rulemaking is a lengthy one. Typically, US DOL submits a proposed rule to the Office of Information and Regulatory Affairs of the federal Office of Management and Budget (OMB). OMB reviews the proposed rule over a period of one to three months (sometimes longer). Once OMB approves the proposed rule, US DOL publishes it in the Federal Register. The federal Administrative Procedure Act will require a period of thirty to sixty days during which the public may submit comments. Once the comment period closes, DOL then writes a final rule. The final rule may be different from the proposed rule or it may be virtually identical.

As a guess, I would say that the new salary thresholds are likely to be effective by July 1, 2024. Also, while US DOL might lower the new salary thresholds in the final rule in response to comments, I think it is unlikely to raise them.

CONCLUSION: WHAT SHOULD LOCAL GOVERNMENTS DO NOW?

North Carolina local government employers should start now to analyze the salaries they pay all exempt employees. How many currently exempt positions fall below the likely new salary threshold of $1,059 per week ($55,068 per year)? For any positions that fall below it, local governments will have to decide what to do.

First, employers should decide whether will it be financially feasible to raise those salaries to the new threshold to maintain the position’s exempt status. Making that determination may require analyzing the number of hours per week that employees in that position worked last year (if, that is, the jurisdiction requires exempt employees to keep track of their time) and then, after converting the exempt salary to an hourly rate, calculating what the overtime cost would be if the employee continued to work a similar number of hours.

Second, as an alternative, employers may lower an employee’s hourly rate so that once the employee starts earning overtime, their total compensation for the year approximates the old salary they earned when classified as exempt.

Third, employers decide to hire part-time employees to do the overtime work that the formerly exempt employees were doing without paid overtime.

A fourth and final alternative is to start paying these formerly exempt employees overtime.

North Carolina cities and counties look to be in fairly good shape in meeting the new salary threshold for managers and administrators and department and division heads. The School of Government’s County Salaries in North Carolina 2023 report shows that in 2022, only 4 out of 68 counties reporting salaries for the human resources director under the proposed new threshold of $55, 068. For the position of county solid waste manager, 10 of 47 reporting counties pay salaries below the proposed new threshold. And only 12 of 55 counties pay their parks and recreation directors under $55, 068 per year.

On the municipal side, current job openings on the North Carolina League of Municipalities website show no openings at the department head level and above where the annual salary looks likely to fall below the new salary threshold.

For both cities and counties, then, it seems likely that the bulk of analysis will need to be done on those positions satisfying the administrative duties test but earning less than the proposed new threshold of $1,059 per week.

The proposed rule may be found here.