Overtime exemptions are about to get more expensive. Under the Fair Labor Standards Act, most employees have to be paid overtime unless an exemption applies. In July, the salary necessary to qualify for the FLSA's "white collar" exemptions will rise to $884 a week, up 29% from current levels. The following January, it will rise again, hitting $1,128 a week—an increase of almost 65%. And from there, the minimum salary will increase every three years according to a fixed formula. Those increases will happen more or less automatically, without any new rulemaking from the Department of Labor.
The Department says these automatic updates are necessary to keep pace with inflation. But focusing on inflation misses the point. The FLSA's minimum salaries were never supposed to raise salaries. They were supposed to help pick out workers doing nonexempt work—the people the statute was meant to cover. In other words, these minimum salaries were a tool for screening out people unlikely to be working in high-skilled, knowledge-based jobs. But today, those kinds of jobs make up an increasing percentage of the workforce. More and more people—at more and more levels of pay—are working with their heads rather than their hands. And by ignoring that change, the Department's rule makes the minimum salaries less useful for their original purpose. It also raises questions about whether we should have minimum salaries at all.
Today, the minimum salaries help determine whether a person gets paid overtime. The FLSA exempts certain jobs from overtime, including executive, administrative, and professional jobs. These jobs are sometimes called the "white collar" exemptions. They focus on workers doing mostly high-level knowledge work involving discretion and judgment. To qualify, a person must primarily perform exempt job duties, be paid on a "salary basis," and earn a minimum salary (today, $684 per week).
At first blush, it might seem odd to focus on salaries this way. After all, the FLSA itself says nothing about salary levels. It refers only to people working in a "bona fide executive, administrative, or professional capacity." In other words, it focuses on a person's duties, not her pay.
Still, minimum salaries have been around nearly as long as the FLSA itself. The Department adopted them in 1938, only months after the law went into effect. At the time, the Department reasoned that salaries were a good proxy for duties. Exempt duties were generally high-level duties, done mostly by a company's top employees. An employee probably wasn't performing those kinds of duties if she was paid only a pittance. So the Department used low salaries as a rule of thumb: they were a way to save time and screen out employees who were "obviously" nonexempt.
Salaries, of course, have risen since 1938. And to keep pace, the Department has periodically updated the minimums. But exactly how to update the minimums has proven controversial, especially in recent years. In 2004, the Department pegged the minimums to the 20th percentile of the lowest-earning Census region. But that level struck some as too low, and in 2016, the Department tried to raise them to the 40th percentile. That increase, however, was not long for this world. The following year, a federal district court struck down the increase, saying the percentile was too high because it effectively flooded out other factors, including job duties. So when the Department returned to the subject in 2019, it raised the minimum salaries in gross terms but reverted to the 20th percentile.
Now, the Department is taking a two-step approach. First, in July, it will update the minimum salaries using the 20th percentile. Then, in January 2025, it will use the 35th percentile. And going forward, it will update the minimums every three years. Those updates will happen more or less automatically, without any new rulemaking. People earning in the lower 35th percentile will never be exempt again.
While that approach may save the Department time, it will also ignore some basic economic facts. It will assume that a fixed percentage of workers are always nonexempt. But in fact, more and more people are doing exempt work. Powered by technology, they are working less with their biceps and more with their brains. And that means more of them should be exempt. After all, the statute exempts people because of the work they do, not the amount they earn per week. Minimum salaries were only ever supposed to be a proxy for exempt duties.
This trend toward exempt duties is hardly new. The workforce has been moving toward high-skilled knowledge work for a long time—at least as long as the FLSA has been around. The statute was passed in 1938, when the labor force centered on manufacturing, agriculture, and other kinds of manual work. But since then, the labor market has been transformed. Most people now have nonmanual service jobs. They work in schools, hospitals, labs, and banks, doing work that requires knowledge and know-how. That transition has been driven mostly by technology, which has given birth to whole industrial sectors and thousands of new job types. By one estimate, more than 60% of people today work in jobs that didn't exist in 1940.
This trend has accelerated in recent decades. Since 1980, Americans have moved en masse into high-skilled, nonmanual jobs. The number of jobs requiring high analytical or social skills has grown from 39 to 76 million, a 94% jump. By comparison, the number of jobs requiring high physical skills has grown from 34 to 38 million—only 12%. And that gap is even wider when broken down by discrete job types. The fastest-growing jobs have been those requiring a combination of high social and analytical skills, such as teachers and managers. The slowest-growing, by contrast, have been those requiring only high physical skills, such as carpenters and welders.
At the same time, workers have become more educated. While only 12% of adult workers had a bachelor's degree in 1980, 33% did in 2015. And that trend goes beyond formal schooling. The number of workers in jobs requiring high levels of preparation—be it education, experience, or some other training—has more than doubled.
What's more, these trends are likely to accelerate in the coming years. Modern workers are facing what could be the most significant workplace disruption since the Industrial Revolution—artificial intelligence. AI promises to make workers more efficient by automating repetitive and mechanical tasks, such as low-level bookkeeping and copyediting. That means, of course, that some people in these fieldscould lose their jobs. But others will be free to spend more time using their discretion and judgment. In other words, thanks to AI, they will be able to devote more of their efforts to exempt work.
But under the Department's approach, many of them will still be treated as nonexempt. As a mathematical fact, some people will always be in the bottom 35th percentile of salary earners. There must always be a bottom tier. And thanks to the automatic updates, that tier will rise along with salaries in general, regardless of the kind of work people do. For these people, job duties will be irrelevant. Even if they do entirely exempt work, they will still fail to qualify for the exemptions.
That result is hard to square with the FLSA. Again, the statute refers only to job duties; it says nothing about minimum salaries. Minimum salaries might once have helped pick out employees who were unlikely to have exempt duties. But increasingly, the minimums are hard to justify that way. It is now possible to imagine an economy driven almost entirely by high-skill knowledge workers. Those workers might devote 100% of their time to exempt work. Yet the Department's rule will still classify them as nonexempt.
That flaw could prove fatal. Business groups have already sued to block the new rule. And again, courts have already tossed one rule that elevated salary levels over all other factors in determining exemptions. That rationale seems to apply as much to the new rule as it did to the old one. So we could be in for a repeat performance. We might even see courts willing to revisit whether minimum salaries still make sense. What worked in a world driven by gaslight may no longer work in one driven by ChatGPT.
Originally published by The Federalist Society.
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