New FLSA Overtime Rules: What Employers Need to Know in 2023

The Proposed Salary Threshold Increase

In 2023, the Department of Labor (DOL) proposed a significant increase to the salary threshold for the white-collar overtime exemptions under the Fair Labor Standards Act (FLSA). The proposal would raise the minimum salary required to classify an employee as exempt from overtime from $35,568 per year to a substantially higher figure, with an automatic updating mechanism built in.

This matters to every employer who has salaried employees classified as exempt from overtime. If the threshold rises and your exempt employees earn below the new level, you will need to either increase their salaries or reclassify them as non-exempt and pay overtime for hours worked over 40 in a workweek.

Understanding the Exemptions

The FLSA requires that most employees receive overtime pay at 1.5 times their regular rate for hours worked over 40 in a workweek. The white-collar exemptions, covering executive, administrative, and professional employees, require meeting three tests:

1. Salary basis test: The employee must be paid on a salary basis, meaning a predetermined fixed amount not subject to reduction based on quality or quantity of work.
2. Salary level test: The salary must meet or exceed the minimum threshold set by the DOL.
3. Duties test: The employee's primary duties must meet specific criteria defined by the regulations for each exemption category.

The proposed rule primarily affects the salary level test. The duties tests remain unchanged.

How to Prepare

Audit your current classifications. Review every position classified as exempt. Confirm that each one meets all three tests under current rules. Many employers discover misclassifications during this process, which is better than having the DOL discover them during an investigation.

Identify affected positions. Determine which exempt employees earn below the proposed new threshold. These are the positions requiring action if the rule is finalized.

Model your options. For each affected position, calculate the cost of two approaches: raising the salary to meet the new threshold versus reclassifying the employee as non-exempt and paying overtime. The right choice depends on the employee's typical hours, your budget, and operational considerations.

Prepare for the cultural shift. Employees who have been salaried their entire careers may view reclassification to hourly status as a demotion, even when their total compensation remains the same or increases. Plan your communication carefully. Emphasize that the change is driven by federal law, not performance.

Update timekeeping systems. Newly non-exempt employees will need to track their hours. Ensure you have adequate timekeeping systems in place and that employees understand how to use them. The failure to maintain accurate time records is itself an FLSA violation.

Review state law requirements. Some states, including California, New York, and Washington, have their own salary thresholds that may be higher than the federal level. Compliance with the higher threshold is always required.

Common Mistakes to Avoid

• Do not wait for the final rule to begin planning. The rulemaking process takes time, but the final rule may have a relatively short implementation window.
• Do not assume job titles determine exemption status. The exemptions are based on duties and compensation, not titles. A "manager" who spends most of their time on non-managerial tasks may not qualify for the executive exemption regardless of salary.
• Do not reduce hourly rates to offset overtime costs. While adjusting hourly rates is legally permissible in some circumstances, doing so can create morale problems and may invite scrutiny.
• Do not overlook the highly compensated employee exemption. The proposed rule also increases the threshold for this exemption, which applies to employees earning above a higher annual compensation level who meet a minimal duties test.

Next Steps

Monitor the rulemaking process through the DOL website and through AEA updates. The final rule may differ from the proposal based on public comments. Regardless of the final numbers, the direction is clear: salary thresholds are rising, and employers need to be ready.

Use this as an opportunity to clean up any existing classification issues. A proactive audit now is far less costly than a DOL investigation or a collective action lawsuit later.