- A significant increase. The DOL’s proposed $20,000 increase in salaried workers’ eligibility for overtime is large enough that businesses are concerned about difficult-to-manage changes to their budgets and business models.
- An adjustment is needed. Some observers posit that an increase to $40,000-45,000 from the current $35, 568 instead would be more in line with past changes, and more manageable for companies.
- Nonprofits and small businesses are most at risk. Analysts note that these organizations have tighter operating margins and are among the sectors that may be hit harder by the change, with an increased likelihood of reduced workforces and additional work being placed on remaining employees.
Businesses are concerned that the federally proposed $20,000 increase in salaried workers' eligibility for overtime is a large-enough jump that they will struggle to comply.
The increase would mean that most salaried employees making less than $55,068 would be eligible for overtime. The current threshold, $35,568, was put into place in 2020, an increase from the previous threshold of $23,660, which had been in place since 2004.
The proposal also would increase the minimum annual salary required to satisfy the Highly Compensated Employee (HCE) exemption from $107,432 to $143,988.
This increase would extend Fair Labor Standards Act (FLSA) overtime protections to more than 3.5 million workers, according to Laurie DuChateau, who leads the U.S. Compliance Consulting Practice at Buck, a Gallagher company. The HCE requirement increase would mean that about 250,000 more employees would be eligible for overtime.
“If these changes are finalized, businesses will face significantly increased payroll costs, likely leading some to re-think their business model, reassess staffing needs and even consider changes to current employee benefit programs,” DuChateau said. “Positions may have to be reevaluated (particularly for first-line supervisors and managers), job descriptions revised, pay practices reviewed, payroll systems adjusted and pay statements modified to reflect these changes within a very tight time frame.”
A Significant Increase
Under the proposed rule, most employees making $1,059 a week would be eligible for overtime, a protection currently extended to employees making $684 a week or less. The jump is significant but not surprising, as it reflects the stated priorities of the Biden administration, said Neal Shah, a partner with the Frost Brown Todd law firm and a member of the firm's Labor and Employment team.
President Obama proposed a similarly significant change that would have increased the salary threshold by almost $24,000. That rule was struck down by a federal court, and a more moderate increase, resulting in the current threshold, was instated during the Trump administration.
The current proposal represents an even-larger leap for employees in the U.S. territories and commonwealths — of Guam, Puerto Rico, the Northern Mariana Islands and the U.S. Virgin Islands, all of which have remained at the previous overtime threshold of $23,660 since 2004.
“My view is that the Department of Labor decided to take the risk of going too far in order to see how far they could go,” said Natalie Bare, a class action and employment law litigator for the Duane Morris law firm.
Shah noted that a more reasonable increase across the board, consistent with prior approved changes, would be a threshold between $40,000 and $45,000.
A Difficult Leap for Businesses
Although the proposed changes will affect most or all businesses and industries, the threshold increase may hit certain sectors harder, including retail, hospitality, warehousing or distribution, healthcare, nonprofits and small businesses.
“Nonprofits are in a difficult position to be dealing with the added expense, whether it's overtime or raising their exempt employees to the new salary levels,” said Lee Schreter, shareholder at Littler Mendelson PC. “What that may mean for nonprofits is that they have to reduce their staff, because they can't afford to keep paying them.
“That increases people's workloads — and nonprofits count on having a supply of staff who are committed to their organizational purposes, who really believe in the organization's mission, and they don't always pay top of the market. So, this will make recruiting even more difficult for them.”
Nonprofits also saw a decrease in charitable contributions during and after COVID, and many have yet to recover from the hit to their budgets.
“Small business and nonprofit organizations are likely to be disproportionately affected by this proposed rule,” Shah reiterated. “If the proposed rule is adopted, these organizations will need to make a costly change. For many of these smaller employers with tighter operating margins, it means they will likely have to reclassify employees that otherwise meet all of the other exemption requirements and make them hourly employees.
“These organizations will also have to exert more control over these employees to ensure they do not work overtime in a way that exceeds their budgets. These employees will likely feel a pressure to get more accomplished in less time.”
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