Will the salary threshold requirement for the white-collar exemption be increasing soon? The U.S. Department of Labor (“DOL”) has issued a proposed rule aimed at doing so, which could jeopardize the applicability of certain employees’ “exempt” status for purposes of overtime and minimum wage requirements. This proposed change thus carries significant implications for nonprofit employers that may not be willing or able to meet the higher monetary threshold for exempt status, such as for their executive staff and other salaried employees who work long hours without additional compensation.
The Newly Proposed Changes to the FLSA Regulations
The proposed rule would modify regulations issued under section 13(a)(1) of the federal Fair Labor Standards Act (“FLSA”) regarding the distinction between “exempt” and “non-exempt” employees. More specifically, the DOL has proposed the following changes for the white-collar exemption as well as the highly compensated exemption (but not other employee exemptions, as addressed below):
1. Increase standard salary level from $684 to $1,059 per week ($55,068 annually for a full-year worker);[1]
2. Increase total annual compensation requirement from $107,432 to $143,988 per year for highly compensated employee (“HCE”);[2] and
3. Automatic updates to the earnings thresholds every three years, based on current wage data.
The DOL’s public comment period for these proposed changes ended in November 2023. The next step is for the DOL to review all submitted comments, then make a final decision. Regardless of this required procedure, changes are seemingly imminent considering significant debate in the past several years. Such extensive debate culminated in 2020 with both (a) a jump from the 1970s-era salary threshold and (b) a recognition that the salary threshold should periodically increase (i.e., not left stagnant).[3]
Meeting the White-Collar Exemption Test
For the white-collar exemption to apply, all three elements of the following exemption test must be satisfied:
1. Salary basis - the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work carried out;
2. Salary threshold - the amount of salary paid must meet a minimum specified threshold amount; and
3. Duties - the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.[4]
The DOL’s proposed salary threshold change, in conjunction with the salary basis and duties elements, will determine who is employed in a bona fide white-collar capacity and is, therefore, exempt from the minimum wage and overtime pay requirements of the FLSA. As proposed, increases will occur regularly and automatically every three years, thus allowing such salary thresholds to keep pace with inflation, and to remain effective in helping to differentiate between exempt and nonexempt employees in the future.
Impact on Nonprofit Employers
Nonprofit employers may find the new salary threshold important for evaluating which employees should be classified as exempt. As one consequence, employers may quickly determine that certain currently exempt employees will in fact be non-exempt based on compensation alone, without the need to evaluate job duties (the third element of the white-collar exemption test). Consequently, they may need to reclassify lower-paid, white-collar workers as non-exempt, notwithstanding significant exempt work, or decide to increase their pay to meet the new salary thresholds. Such considerations may apply more acutely for executive directors, employees who frequently work more than forty hours per week, and other employees with widely varying work hours and significant job responsibilities.
The DOL reportedly estimates that within the first year of its effective date, the revised regulations will result in 3.4 million currently exempt employees who earn at least the current salary level of $684 per week, but less than the proposed standard salary level of $1,059 per week will, consequently become eligible for overtime pay. But this prediction is absent any employer-initiated increase in compensation to at or above the new salary level. The DOL’s proposed regulatory changes thus may significantly impact employers within the nonprofit sector, especially those operating on tight budgets.
Other Exemptions? No Salary Threshold
Notably, the white-collar exemption and its accompanying salary threshold does not apply to certain types of employees. Rather, such employees are covered by other exemptions to overtime pay and minimum wage requirements. These exemptions include the following categories of employees: employees covered by the ministerial exemption; teachers; employees engaged in certain computer-related occupations; certain seasonal workers; doctors; and attorneys. These exemption categories may likewise be significant for many nonprofits (e.g., churches, summer camp operations), since such employees will remain exempt without regard to their compensation amounts.
Note too that state and local laws may – or may not – be analogous to the FLSA, especially with respect to seasonal employees. When in doubt, evaluate (a) each employee’s job description and (b) applicable federal, state, and local law for each employee’s work location.
Legal Compliance Attentiveness
Be prepared to address related legal compliance requirements, especially for currently exempt employees who may become eligible for overtime pay. In that event, remember that such employees will need to be paid additional compensation for any overtime actually worked (as well as minimum wage). Depending on the circumstances, it may be appropriate to prohibit overtime work as a discipline-related matter – but such pay must be provided if actually earned.[5]
It may be wise to require overtime-eligible employees to keep track of their time worked, such as through computer software that allows for recording this information. Imposing this requirement may prove quite useful in the event that an employee later asserts an overtime claim, to refute a claim or otherwise determine whether a claim is legally valid.
What’s Next for Nonprofit Employers?
Should employers increase salary amounts for white-collar employees salary solely based on the anticipated threshold increase? Perhaps, especially if affected employees would otherwise accumulate significant earned overtime pay for regularly exceeding forty hours per week.
Correspondingly, nonprofit employers may want to identify whether any categorical exemptions could apply to certain employees (e.g., the ministerial exemption), possibly with related modifications to such employees’ job descriptions. Additionally, employers may need to evaluate whether any other employment-related adjustments should be made, such as prohibiting overtime work. Since employers must pay overtime when earned, they may wish to prohibit such activity – or at least restrict it to as little as possible. Restructuring job assignments may also be a practical way for some nonprofits to avoid overtime work situations. Employers should likewise consider modifying time-keeping protocols and addressing related record-keeping aspects, as part of legal compliance for meeting their overtime pay obligations.
Our firm is monitoring these important employment law changes - particularly what, if any, modifications result from the notice and comment period. Next steps consist of DOL review and potential litigation challenging the changes. Some practitioners have estimated that the finalized changes will become effective in summer 2024. Pending further developments, this time frame should give nonprofit employers time to consider what resulting changes may be warranted. As with so many employment-related legal compliance matters, continued attentiveness, and capability to address emergent issues remain vitally important.
[1] This number is reportedly consistent with the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region.
[2] This compensation amount is reportedly consistent with the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally.
[3] See our law firm’s prior article: New Salary Threshold for White Collar Exemption.
[4] For more information about the duties portion of the test, which can involve certain complexities, please see our law firm’s blog article.
[5] For guidance about calculating overtime pay, please see our firm’s related blog article. Note, however, that the article’s information is based the current salary threshold – not the proposed increase.
