Regulatory Topic: Wages and overtime hours
Regulatory Agency: DOL
In carrying out the Fair Labor Standards Act (FLSA), the U.S. Department of Labor (DOL) is responsible for overseeing a variety of employment laws including matters surrounding wages and hours worked, including which workers under which conditions will receive “overtime” pay for their work. Specifically, this is handled by the Wage and Hour Division (WHD).
On September 8, 2023, DOL issued a newly proposed rule related to overtime pay and eligibility titled: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees. Among other things, the rule makes changes particularly to which salary threshold will be used to determine which “white collar” workers must receive overtime pay (1.5 times the normal wage rate) when working over 40 hours in a week.
Key concerns around the rule include lost schedule flexibility for white collar salaried workers who may currently work more at some points to take time off at other points, and significantly increased compliance costs for businesses that must adjust to the new restrictions and requirements, which could also lead to reduced hours and jobs for employees. The Biden DOL estimates that over 3.6 million white collar workers would be currently be impacted by this.
The comment period for this rule is now open and closes on November 7, 2023.
Key features of the newly proposed Biden DOL overtime rule
On September 8, 2023, the Biden DOL proposed its new rule that would increase the white collar wage threshold for exemptions to $55,068, a nearly $20,000 increase over a Trump rule that went into effect in 2020. This means that anyone earning base income below this salary must be paid overtime pay when their work exceeds 40 hours in a 7 day period regardless of whether or not they might work fewer than 40 hours in a future period to offset the extra work. Additionally, the wage threshold will rise to whatever the 35th percentile wage of the “lowest-wage Census Region” currently is, thereby raising the threshold on a permanent basis over time.
The major increase will face similar legal scrutiny as the aggressive Obama era increase did (see below), putting its eventual implementation on a path of uncertainty.
Also of note, the rule would increase the highly compensated employee (HCE) annual compensation threshold to $143,988, indexed to the 85th percentile of full-time salaried workers. This would be an immediate increase from the current threshold of $107,432. The significance of this threshold is primarily that anyone earning a salary below the threshold is eligible to contribute unlimited amounts of income to 401(k) retirement plans while HCE earners have strict caps on what they can contribute.
Background: Brief history of FLSA overtime rules including actions by other recent administrations.
As originally enacted, the Fair Labor Standards Act of 1938 (FLSA) set forth a variety of stipulations on overtime pay and eligibility. This included a clear exemption from overtime pay requirements for employees in a “bona fide” executive, administrative, professional, and outside salesman capacity. There are also exemptions for a range of technology/computer-specialized employees.
No salary thresholds were included in statute, but despite this, over decades DOL has instituted rules that set salary thresholds for certain workers whereby anyone earning under the weekly or annual set wages must be paid overtime pay for work over 40 hours in a one week period.
In 2016, the Obama administration attempted to update the white collar exemptions for the first time since a 2004 rule, increasing it from $23,360 to $47,476, but a U.S. district court in Texas blocked this in 2016 and fully struck the rule down in 2017, arguing that the Obama administration overstepped its authority by minimizing consideration of the types of professions under consideration and putting most focus on salary amounts instead.
In September 2019 the Trump administration proposed a new rule, which went into effect on January 1, 2020. The Trump DOL rule increased the wage threshold to $35,568.
Brief DOL overtime “white collar” rule timeline
Overtime eligibility wage thresholds have been changed multiple times for different workers since 1938 but less often in recent decades until the Obama, Trump, and Biden administrations have consecutively been active in the process. Here are some notable dates for changes:
- 1938 – No earnings threshold for professional exemption but $1,560 annual threshold for executive and administrative personnel.
- 1940 – Executive threshold set at $1,560. Administrative and professional set at $2,600.
- 1949 – $5,200 threshold for all overtime exemptions, $2,860 for executive, $3,900 administrative and professional.
- 1958 – $6,500 white collar exemption, $4,160 executive, $4,940 administrative and professional
- 1963, 1970, 1975 – additional exemption increases across different employee classifications.
- 2004 – $23,660 annual wage threshold set for all white-collar exemptions, the first uniform white collar exemption threshold in decades.
- 2016 – Obama administration publishes a rule to increase salary-threshold to $47,476, but a federal judge from the U.S. District Court for the Eastern District of Texas blocks implementation in November 2016 for time to review the rule further.
- Aug 2017 – The same Texas federal judge that blocked the 2016 Obama rule strikes it down permanently, stating the Obama administration “overstepped its authority.”
- Jan 2020 – Trump administration rule goes into effect, setting a wage threshold of $35,568 annual, or $684 a week, for white collar exemptions.
- September 8, 2023 – The Biden administration proposes a new white collar wage threshold of $55,068, indexed to increase with inflation.
- Notice of Proposed Rulemaking: Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees. Frequently Asked Questions. https://www.dol.gov/sites/dolgov/files/WHD/flsa/overtime-nprm-faqs.pdf
- FLSA: Proposed Overtime Rule Issued (comments due 11/7). https://www.shrm.org/resourcesandtools/tools-and-samples/exreq/pages/details.aspx?erid=161
- Federal Regulations Work Overtime To Kill American Prosperity. https://reason.com/2016/05/24/federal-regulations-work-overtime-to-kil/
- DOL Proposes to Significantly Increase the Minimum Salary Level to Qualify for the “White Collar” Overtime Exemptions. https://www.littler.com/publication-press/publication/dol-proposes-significantly-increase-minimum-salary-level-qualify-white
- Biden administration working overtime to regulate working overtime. https://cei.org/blog/biden-administration-working-overtime-to-regulate-working-overtime/
- Timeline: Overtime Rule History. https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/timeline-overtime-rule-history.aspx
- US Overtime Rule Will Ruin Workplace Flexibility. https://www.heritage.org/jobs-and-labor/commentary/us-overtime-rule-will-ruin-workplace-flexibility
- ABC: DOL Overtime Rule Creates More Risks and Costs in Face of Economic Headwinds. https://www.abc.org/News-Media/News-Releases/abc-dol-overtime-rule-creates-more-risks-and-costs-in-face-of-economic-headwinds
- An Economic Analysis of Overtime Pay Regulations. Donald Boudreaux and Liya Palagashvili. https://www.mercatus.org/hayekprogram/research/working-papers/economic-analysis-overtime-pay-regulations
- BIDEN BUMPS THRESHOLD GUARANTEEING OVERTIME PAY FOR SELECT GROUP OF EMPLOYEES. https://www.braun.senate.gov/news/in-the-news/biden-bumps-threshold-guaranteeing-overtime-pay-for-select-group-of-employees/