In the realm of employment law, few pieces of legislation evoke as much discussion, anticipation and, often, frustration, as the First Labor Standards Act (FLSA). This year is no different, with the proposed FLSA changes sending ripples of uncertainty about their potential impact through the business community.
Core Objectives
FLSA has long been a cornerstone of labor regulations in the United States, governing various aspects of employment law, such as minimum wage, overtime, recordkeeping and youth employment standards. At the heart of the Act are policies designed to protect workers’ rights and set fair and ethical labor practices.
A Whirlwind of Legislative Changes
Over the past few years, FLSA has been heavily scrutinized, resulting in a series of changes that have left employers confused. Here is a brief review of where we have landed so far:
- February 2023 — The Wage and Hour Division clarified the guidelines around hours worked, specifically in a remote/hybrid work environment. Key clarifications included that breaks of 20 minutes or less must be considered hours worked and that reasonable break time must be offered to employees to express breast milk whether they are working at their employer’s work facility or at home.
- January 2024 — The Department of Labor published a final rule offering guidance on defining an independent contractor status. The 2024 final rule restores the definition of an independent contractor to its original form prior to the changes put in place under the Trump Administration. Under the final rule, employers are advised to consider the “totality of the circumstances” using the six-factor test.
2024 Proposed Changes
In August 2023, the Department of Labor (DOL) proposed a rule change to increase the salary limit for overtime exemptions, otherwise known as the “minimum salary threshold.” Per the proposed change, the weekly salary limit would increase from $684 to $1059 (equating to $55,068 annually). Additionally, the suggested rule also proposes an increase in the salary threshold for the exemption of highly compensated employees from $107,432 to $143,988 per year.
The DOL’s proposal includes an automatic update feature that would adjust these thresholds annually in line with current earnings data. In November 2023, the House Subcommittee on Workforce Productions noted several issues with the proposed changes, including the potential difficulties for the rule’s future adoption by employers.
It is currently unclear when the proposed changes may pass and what those proposed changes may be; however, discussions and negotiations continue. Some estimate that we may see changes enacted as early as Q2 2024.
Navigating the Uncertainty: Defining the Impact
The proposed changes to the FLSA minimum salary threshold could have significant financial implications for employers. Below, we explore the two primary strategies employers may use to comply with these changes and the associated considerations.
Option 1: Increase salaries below the minimum threshold.
One compliance approach may be to increase the salaries of (salaried) employees currently earning less than the new minimum. This approach is likely true to the intention or spirit of the proposed rule changes; however, it does pose a risk of creating or compounding compression issues that currently exist due to the high inflation and tight labor market over the past few years.
Compression is observed when there is a minimal difference in pay between employees regardless of skills, experience or position requirements. To avoid this, employers may have to adjust their compensation structures and provide general adjustments to employees to realign them to the updated structure.
Option 2: Reclassify positions.
Alternatively, employers may choose to reclassify salaried positions currently paid below the threshold as a non-exempt positions. This strategy also has its own set of financial implications. Reclassifying roles as overtime-eligible could potentially increase labor costs, particularly if these positions frequently require that employees work more than 40 hours per week. Additionally, reclassification may also affect overall compensation packages if certain benefits are tied to exemption status.
Employers considering this option should ensure there is an adequate system for tracking and reporting time for their non-exempt positions. Additionally, employers may consider implementing guidelines and/or processes to help mitigate overtime without prior approval. Finally, for some employees, there is a higher-level status associated with being classified as exempt. Employers should scan their culture to understand how a change in exemption status could impact employee morale.
Understanding and planning for the financial implications of the proposed FLSA changes is critical for employers to determine which option is best for them. Both strategies — increasing salaries or reclassifying positions — have advantages and disadvantages that should be weighed carefully.
RKL Virtual’s Workforce Strategies team can help your organization better understand the impact these potential changes could have on your business. Reach out to your RKL advisor or use the form below to start the conversation.
