The rumors circulating since June 2021 have proven to be true: the U.S. Department of Labor (DOL) has proposed a rule that would substantially increase the salary basis threshold for exempt employees.

As a reminder, employees who do not meet one of the overtime exemptions under the Fair Labor Standards Act (FLSA) – the executive, administrative, professional, certain computer, outside sales, or highly-compensated employee exemptions – must be paid overtime (1.5x the regular rate) under federal law for all hours worked in excess of 40 hours per week. Such employees are classified as nonexempt employees. Note that state and local laws may be more generous to employees than this federal FLSA standard.

To be considered exempt from overtime pay, an employee must meet a duties test and must be paid on a salary basis. “Salary basis” means that the employee regularly receives a predetermined amount of compensation each pay period that is not subject to reduction because of variations in the quantity or quality of work.

In addition, the employee must be paid at least the applicable salary threshold. Currently, the salary threshold for exempt employees is $35,568 per year ($684.00 per week). The DOL’s proposed rule would increase the salary threshold from $35,568 to $55,068 per year (or at least $1,059 per week). The proposed rule would also increase the salary threshold for the highly-compensated employee exemption from its current level of $107,432 to $143,988 per year.

The proposed rule also provides for automatic updates to the salary threshold every three years beginning when the proposed rule goes into effect using then-current wage data and following notice published in the Federal Register. You may recall that this automatic update to the salary threshold was particularly controversial when the DOL attempted to include it in the rulemaking proposed during the Obama administration.

The practical effect of this rule, if finalized in its current form, is that many workers who meet the exempt duties test but do not earn $55,068 per year will either become nonexempt employees eligible for overtime or need to have an increase in their compensation to meet the increased salary threshold. Notably, employers may use non-discretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis to satisfy up to 10% of the salary threshold.

Given the proposed increase in the salary threshold and its potential impact on employers’ payroll obligations, there is a high likelihood that this rule will be challenged in court. Whether the proposed rule will be modified and/or challenged remains to be seen, but we will be carefully monitoring all developments.