On March 22, 2019, after much speculation, the Department of Labor (“DOL”) released its long-promised proposed rule amending the salary requirement for exempt employees under the Fair Labor Standards Act.
Evolution of the Overtime Regulation
The Fair Labor Standards Act (“FLSA”) is the federal minimum wage and overtime law. Unless exempt, employees covered by the FLSA must receive overtime pay for hours worked over 40 in one workweek. To be exempt from overtime (i.e., not entitled to receive overtime), an exemption must apply.
In 2004, the DOL adjusted the minimum salary level, providing that to be exempt from the FLSA’s overtime compensation requirements under the “white collar” exemptions (e.g., executive, administrative, professional employees), employees must be paid on a salary basis of at least $455/week as well as perform specific, defined exempt duties.
In 2016, the DOL announced that it was implementing new regulations that would raise the salary threshold requirement to $913/week. This substantial increase would have resulted in as many as four million exempt workers being reclassified to non-exempt. However, on November 22, 2016, a federal district court judge in Texas enjoined the new salary threshold rule, effectively invalidating its implementation.
Since then, employers have been left wondering whether, when, and to what extent the FLSA overtime regulations may change.
Current Overtime Regulation
The DOL has now formally rescinded the 2016 rule and proposed a new rule that:
1) Raises the salary threshold from $455 per week ($23,660 per year) to $679 per week ($35,308 per year);
2) Allows employers to include “certain nondiscretionary bonuses and incentive payments (including commissions)” to satisfy up to 10% of the new $679 per week salary threshold;
3) Raises the total annual compensation requirement for highly compensated employees (“HCE”) – which are subject to less rigorous “duties” test – from $100,000 to $147,414; and
4) Revisits the salary threshold periodically through new proposed rulemaking, rather than increase it automatically each year as proposed in 2016.
With the 60 day notice and comment rulemaking period beginning today, the DOL anticipates a final version shortly before the 2020 election, giving employers ample time to adjust salaries upward or switch employees from salary to hourly.
There is no anticipated change to the duties tests, so reclassification – if any – will be based on salary alone. Thus, in the meantime, employers should: 1) identify the salary levels of employees in its workforce currently classified as exempt under the “white collar” exemptions to determine whether it meets the proposed annual minimum of $35,308; 2) identify any highly compensated employees earning between $100,000 and the proposed $147,414 threshold who perform duties that make them exempt under the HCE exemption, but not under the “white collar” exemption; and 3) before making any adjustments to your pay practices, consult with employment counsel to determine the effect of the proposed rule on your specific business needs.