The Department of Labor’s September 2023 proposed rule to expand overtime protections to millions of employees is the proverbial freight train heading right for employers’ pocketbooks. This proposed rule, which is in the final days of the approval process, would increase the salary threshold for overtime exemptions from $684 per week to $1,059 (or $35,568 to $55,068 annually). Though we have not seen the final version of the rule—and legal challenges that will seek injunctive relief to bar its enforcement are a given—employers may want to take steps now to prepare.

As a reminder, the Fair Labor Standards Act requires that businesses pay overtime to employees for hours worked over 40 in a week unless the individual meets an exemption. These include staff employed in bona fide executive, administrative, or professional positions (commonly referred to as the “white collar” or “EAP” exemptions). To qualify, EAP employees must meet a salary threshold test and a job duties test. Also, “highly compensated” employees that perform office or non-manual work and earn at least $107,432 are exempt if they “customarily and regularly” execute at least one of the duties of an EAP employee. The proposed rule bumps the HCE salary exemption to $143,988.

Increasing the threshold amounts (a footnote in the proposal suggests the salary figure might be closer to $60,209 in 2024) would result in about 3 million employees nationwide finding themselves entitled to overtime. Once the DOL announces the Final Rule and publishes it in the Federal Register (expected this month), employers will have only 60 days to comply (assuming no legal injunction). As an aside, a similar 2016 Obama-era rule was overturned on the ground that the DOL had exceeded its rule-making authority.

Though the Fifth Circuit has repeatedly stymied the Biden Administration’s regulatory attempts, employers should nevertheless consider what the successful passage of this new regulation might mean, not only in terms of increased payroll costs but also with regard to employee reclassification issues. How will currently exempt workers react to being asked to turn in a timecard? Does the employer even have a time-tracking system? Will newly non-exempt employees lose the flexibility afforded a salaried worker? How can employers message these changes to promote retention and enhance the employee experience? Businesses may want to start to consider how these changes would be communicated to their staff, including training of supervisors who will now have to carry out time-tracking duties.

Any changes to the federal overtime rule will only add to the complex compliance landscape in states that—like Oregon and Washington—already have state-level overtime regulations. These state laws impose additional, different requirements for EAP exemptions, including specified duties tests. Maintenance of exemptions usually requires that you meet both state and federal requirements. Washington employers previously faced these hurdles when the state instituted a series of annually increasing salary thresholds starting in July 2020. Washington’s 2024 salary exemption threshold is $67,724.80. Oregon employers, however, may wish to think about how they might respond to the federal increase. Companies in Washington and Oregon that utilize EAP exceptions will continue to have burdens associated with tracking state distinctions in the duties tests for EAP exemptions to ensure that employees classified as exempt meet all applicable requirements.

Schwabe’s Labor and Employment attorneys plan further updates as the Final Rule makes its way to publication. For now, employers may want to consider contacting their lawyers to assist with formulating a compliance strategy.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

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