What Employers Need to Know About Two Upcoming Changes to Federal Law: Federal Salary Threshold for Exempt Employees and Department of Labor Rule on Independent Contractors

By Bill Wahrer and Shiloh Theberge

1. New Federal Salary Threshold for Exempt Employees

In August of 2023, the U.S. Department of Labor (“DOL”) issued a Notice of Proposed Rulemaking that sought to increase the applicable minimum salary levels for the administrative, professional, executive, and highly compensated employee exemptions under the Fair Labor Standards Act (“FLSA”).

Along with meeting certain job duties tests, each exemption includes a requirement that the respective position be paid a certain salary amount in order to potentially qualify under that respective exemption. For example, in 2023, the applicable salary threshold for the administrative employee exemption was $35,568 per year or $684 per week. Under the DOL’s Notice of Proposed Rulemaking, that amount would be raised to $55,000 per year or $1,059 per week—a roughly $20,000 increase. For the highly compensated employee exemption, the amount would increase from $107,432 to almost $144,000—a nearly $40,000 increase.

Even for employers in states that have a minimum salary threshold already above the federal minimum (Maine, for example, currently has a minimum salary threshold of $42,450.20 per year or $816.35 per week for administrative employees), this increase is notable. For those states that are aligned with the federal thresholds, this proposed change is a significant increase that will undoubtedly cause consternation and lead to difficult financial and personnel decisions for employers.

Presently, it is unclear when the DOL’s final rule will be published, but it is reasonable to expect that it will be announced in Spring 2024, at the latest. Typically, once published, the rule becomes effective no later than 60 days after its publication.

As a result of this coming change, now is the time for employers to review their exempt employees and determine whether the proposed salary increases are manageable for their presently exempted employees or whether currently exempted employees need to be transitioned to a non-exempt designation. Further, even those employers that believe the new, higher salary thresholds will not be problematic should take this opportunity to properly review and examine their exemptions for compliance with all applicable standards, including job duties requirements.

2. New Department of Labor Rule on Independent Contractors

Effective March 11, 2024, there will be a new federal rule regarding how employers evaluate whether an individual is an independent contractor under federal law.

On January 10, 2024, the DOL issued its final rule detailing how employers should analyze whether an individual qualifies as an independent contractor. This rule modifies the 2021 “economic reality test” used by the DOL that consisted of analysis of five economic reality factors: (1) the nature and degree of the individual’s control over the work; (2) the opportunity for profit or loss; (3) the skill required; (4) the permanence of the working relationship; and (5) whether the work is part of an integrated unit.

In the DOL’s new rule, it states that the 2021 rule “marked a departure from the consistent, longstanding adoption and application of the economic reality test by courts and the Department of how to determine whether a worker is an employee or an independent contractor under the FLSA.” As such, the new rule will utilize six primary, non-exhaustive factors:

1. 1. opportunity for profit or loss depending on managerial skill;
   2. investments by the worker and the potential employer;
   3. degree of permanence of the work relationship;
   4. nature and degree of control;
   5. extent to which the work performed is an integral part of the potential employer’s business; and
   6. skill and initiative.

The new rule calls for a “totality-of-the-circumstances analysis,” which means  that no one factor is dispositive or controlling. Furthermore, and importantly, the DOL provides that additional factors may be relevant “if the factors in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.”

This new rule is notable insofar as it suggests that, at least on the federal level, the DOL is retreating from the commonly viewed employer-friendly 2021 rule. Still, it is important to remember that the new federal DOL guidance does not alter an employer’s applicable state law guidance on what that respective state considers in evaluating whether an individual is an independent contractor. For those in Maine, the Maine DOL provides a helpful step-by-step process which can be found here. New Hampshire provides a multi-factor test, all of which must be satisfied, at N.H. Rev. Stat. § 281-A:2.