DOL's Authority to Set Salary Threshold for Overtime Exemption Upheld: Key Insights for Employers

On September 11, 2023, the 5th U.S. Circuit Court of Appeals reaffirmed the U.S. Department of Labor’s (DOL) authority to set salary thresholds for overtime exemptions under the Fair Labor Standards Act (FLSA). This decision, which avoids a circuit court split on this issue, solidifies the long-standing practice that employers and HR professionals must follow when determining eligibility for overtime pay for white-collar employees. However, the legal landscape remains dynamic, as challenges to recent increases in salary thresholds could arise, leaving employers uncertain about compliance in the coming years.

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Historical Context: The Challenge to Established Practice

For decades, the DOL has used a three-part test to determine whether certain employees are exempt from overtime pay under the FLSA’s white-collar exemption. This test includes the employee’s job duties, their salaried status, and whether they earn more than a specified minimum salary. Over the years, this salary threshold has been periodically updated, sparking debate over the DOL’s authority to impose such requirements.

In 2019, under the Trump administration, the salary threshold for exemption was increased to $35,568 per year, a rule that took effect in 2020. A legal challenge was launched, arguing that the DOL overstepped its authority by imposing a salary requirement, contending that this authority was an unconstitutional delegation of legislative power.

The 5th Circuit, however, rejected this argument. In its ruling, the court stated that the DOL has the statutory authority to set minimum salary levels for exempt employees, in line with the FLSA’s provisions. This decision aligns with rulings from four other federal appeals courts, solidifying the DOL’s authority in this area.

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Real-World Application:

For HR professionals, this ruling emphasizes the importance of understanding the FLSA’s white-collar exemptions and the salary threshold requirements. Employers should regularly review their compensation structures to ensure compliance with federal regulations, particularly during periods of salary threshold changes.

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The Three-Part Test for White-Collar Exemptions

The FLSA’s white-collar exemptions cover executive, administrative, and professional employees, commonly known as “EAP” exemptions. To qualify for these exemptions, an employee must meet all three prongs of the test:

1. Salary Basis Test: The employee must be paid a fixed salary that does not fluctuate based on the quality or quantity of work.
2. Salary Level Test: The employee must earn above the designated salary threshold, which is currently set at $35,568 but is set to increase.
3. Duties Test: The employee’s job duties must primarily involve executive, administrative, or professional tasks, as defined by the FLSA.

If an employee fails to meet any one of these requirements, they are entitled to overtime pay for hours worked beyond 40 in a workweek.

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Practical Advice:

HR professionals should audit their workforce regularly to ensure that employees classified as exempt meet all three criteria of the FLSA’s white-collar exemption. Misclassification can lead to costly lawsuits, back wages, and penalties. A comprehensive review of job descriptions, salaries, and duties is essential during periods of regulatory changes.

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The Biden Administration’s New Overtime Rule

In 2023, the Biden administration took steps to significantly increase the salary threshold for white-collar exemptions. The new rule introduces a two-part approach to raising the threshold, with one increase taking effect on July 1, 2024, and another on January 1, 2025. By the end of this two-phase implementation, the salary threshold will rise to $58,656, representing a nearly 65% increase from the current level.

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Key Dates to Remember:

• July 1, 2024: Salary threshold increases from $35,568 to $43,888.
• January 1, 2025: Salary threshold further increases to $58,656.

This change will have a significant impact on millions of workers who will now be eligible for overtime pay unless their employers increase their salaries to meet the new threshold. Employers must begin preparing for these changes now, as failure to comply could lead to significant financial liabilities.

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Practical Advice:

Employers should conduct salary reviews for all exempt employees earning below $58,656. If pay raises are not feasible, employers will need to reclassify these employees as non-exempt and ensure that they are tracking their hours and receiving overtime pay as required by law. Additionally, organizations should consider the broader impact on morale, retention, and budgeting when making these decisions.

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The Impact of Legal Challenges

While the 5th Circuit upheld the DOL’s authority to set salary thresholds, ongoing legal challenges could impact the implementation of the Biden administration’s rule. For example, on June 28, 2023, a district court blocked the new federal overtime rule from applying to employees of the state of Texas, citing the Supreme Court’s decision in Loper Bright Enterprises.

The court’s ruling highlights the possibility that other states or groups may file similar lawsuits to block the rule’s application. This creates uncertainty for employers who must plan for compliance while acknowledging the potential for legal roadblocks.

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What Employers Should Do:

Despite the legal uncertainty, employers should not delay in preparing for the rule’s implementation. HR professionals should develop a contingency plan, including reclassification strategies and payroll adjustments, in case the new rule is blocked or modified. Organizations should also monitor legal developments closely and seek guidance from legal counsel to stay ahead of potential challenges.

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Preparing for the Future: Key Considerations for HR

With the FLSA’s salary threshold set to increase, HR professionals must take proactive steps to ensure their organizations are ready for the changes. Here are some practical strategies to consider:

1. Conduct a Salary Audit: Review the salaries of all exempt employees to identify those who will be affected by the new threshold. Consider whether salary increases or reclassification will be the most cost-effective solution.
2. Communicate with Employees: If reclassification is necessary, communicate the changes clearly to employees. Explain the reasons behind the reclassification and the impact on their compensation, work hours, and eligibility for overtime pay.
3. Adjust Payroll Systems: Ensure that your payroll systems are equipped to handle the changes. This includes tracking hours for newly non-exempt employees, calculating overtime, and complying with state-specific wage and hour laws.
4. Prepare for Budget Impact: The increase in salary thresholds could have a significant financial impact, particularly for small businesses. Work with your finance team to project the costs of compliance and adjust budgets accordingly.
5. Stay Informed: Keep abreast of legal developments and court rulings that may affect the implementation of the new overtime rule. Subscribe to industry newsletters, attend webinars, and consult with legal experts to stay informed.

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Conclusion

The DOL’s authority to set salary thresholds for overtime exemptions has been upheld, but the new salary levels set to take effect in 2024 and 2025 present challenges for employers. As legal challenges continue, HR professionals must prepare for compliance while remaining flexible in the face of potential changes. The key to navigating this complex landscape is proactive planning, clear communication, and staying informed about legal developments.

At Axis HR Solutions, we specialize in helping businesses navigate the complexities of labor law and compensation regulations. Our team of HR experts can assist with salary audits, employee reclassification, payroll adjustments, and compliance strategies tailored to your organization’s unique needs. Don’t wait until the last minute—ensure your business is prepared for the upcoming changes to the FLSA’s overtime rules.

For more information on how Axis HR Solutions can support your organization through this transition, visit us at axishrky.com.