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DOL Proposes Rule Increasing Minimum Exempt Pay Levels

The U.S. Department of Labor announced on March 7, 2019 a Notice of Proposed Rulemaking (NPRM) that would raise the minimum salary threshold for exempt employees while making more American workers eligible for overtime. The DOL projects that the new regulations will take effect in January 2020.

Workers earning at the current level (set back in 2004) may be eligible for overtime based up on job duties. The new rule, if passed, updates the standard salary level from $455 to $679 p/wk. ($35,308 per year) under proposed rules from the US Department of Labor (DOL). Currently, those earning salaries below $455 p/wk. ($23,660 annually) must be paid overtime after 40 hours a week.

That is nearly a 50% increase from the current level of $23,660 ($455 per week), but well below the salary level set by the DOL under the Obama Administration, which would have set the salary level at $47,476 ($913 per week). The Obama-era rule was blocked by a permanent injunction issued by a Texas district court judge. The proposed rule rescinds the 2016 Obama rule.

At the outset, the rule proposes to rescind the 2016 final overtime exemption rule, and to update the current governing standards from the 2004 rule. As employers will recall, the 2016 final rule was invalidated by a federal court, and on appeal, the Fifth Circuit stated that it would "hold the appeal in abeyance while the DOL undertakes further rulemaking to determine what the salary level should be."

For now, no need to panic even if you have exempt employees whose salaries fall below the proposed new minimum. It will be months before we know exactly what the final rules will look like, let alone whether they will survive the inevitable legal challenges.

Stay tuned for updates and further analysis.

Summary of Key Points in the NPRM

The DOL's proposed regulations also would:

  • Allow employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level test, as long as they are paid annually or more frequently;
  • Increase from $100,000 to $147,414 the minimum annual compensation for highly compensated employees who face a looser duties test;
  • Propose updates to the minimum salary levels every four years through notice-and-comment rulemaking to "prevent the earnings threshold levels from becoming significantly outdated in the future and to provide predictability and certainty for the benefit of workers and employers";
  • Maintain the current minimum annual salary level of $23,660 for employees in the US territories of Guam, Puerto Rico, the U.S. Virgin Islands and the Northern Mariana Islands and of $19,760 for employees in American Samoa; and
  • Increase the base weekly compensation rate for employees in the motion picture industry who are exempt from the salary basis requirement from $695 to $1,036.
  • The proposed rule provides for one threshold regardless of which exemption, industry, or locality, subject to a few exceptions that already exist.
  • No changes were proposed to the duties tests for the exemptions.
  • No “automatic” updates were proposed. Rather, The DOL will intend to propose updates to the salary and compensation levels every four years. This is different from the 2016 rule, which built in automatic increases to the salary level.

An additional 1.1 million workers who are currently overtime-exempt will become eligible for overtime unless their employers raise their salaries, reorganize workloads, adjust work schedules or spread work hours in order to avoid overtime pay, the DOL estimates.

Unlike the ill-fated 2016 Regulations, this proposal does not call for automatic adjustments to the salary threshold. Further, there is no expected change to the incumbent duties test, so any reclassification would be solely based on the “Salary Threshold” test for exemption, as the “Salary Basis” and “Duties” tests are unaffected by these proposed regulations.

Be Mindful of State Laws

Employers should also be mindful that state laws are often more stringent than the federal law. Regardless of what the final DOL rule may include, employers also must consider how the new rule interacts with the corresponding exemptions under the myriad of state laws. Some states do not have overtime laws; others incorporate the FLSA as it stands; others incorporate the FLSA’s overtime provisions, but with higher salary requirements; and others have their own exemptions and salary levels without reference to the FLSA. For example:

  • New York - In December 2016 New York raised the exemption levels for the state on a tiered basis according to geographic location. All areas of New York are currently subject to high salary exemption levels (e.g., the salary exemption level for update New York employee raised to $43,290/year on December 31, 2018).
  • California - To qualify as an exempt employee, the worker must be paid a fixed salary (rather than an hourly wage) equal to at least twice the state minimum wage.
  • Alaska - Alaska requires that exempt employees be paid a minimum of two times the state minimum wage for the first 40 hours worked in a week.
  • Connecticut - The employee must be compensated on a salary or fee basis that excludes boarding, lodging and other facilities.
  • Oregon - Oregon’s exempt salary threshold is calculated by taking the applicable minimum wage and multiplying it by 2080 hours per year. Note that within certain counties, specific areas may have an urban or a non-urban minimum wage.

Be certain that you understand the Salary Threshold and other applicable overtime rules in your state or local jurisdiction.

Next Steps

The DOL is currently seeking public comment regarding the proposal to satisfy notice-and-comment rulemaking. The public (including employer groups) will have 60 days from the time the proposed regulations are officially published in the Federal Register to comment.

Should you wish to submit comments, use identifying Regulatory Information Number: (RIN) 1235-AA20, and deliver by either of the following methods:

  1. Electronic Comments: Submit comments through the Federal eRule-Making Portal. Follow the instructions for submitting comments.
  2. Mail: Address written submissions to Melissa Smith, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

After the comment period ends, the DOL will respond to comments and possibly make revisions before publishing a final rule. This final rule will include a formal effective date.

Reconsidering the 2016 Proposed Rule

In 2016, the Obama administration DOL issued regulations that would have more than doubled the minimum salary level to $47,476 per year. But a week before the regulations were to take effect, a federal district court blocked them - ruling that the DOL exceeded its authority by raising the minimum salary level so high that it effectively would make the duties tests irrelevant.

Under the Trump administration, the DOL has acknowledged that the standard salary level needs to exceed $23,660 to more effectively serve its purpose. But it also stated that increasing the standard salary level to $47,476 per year was inappropriate. That level would have excluded from exemption 4.2 million employees whose duties would have otherwise qualified them for exemption, a result it said was "in significant tension" with the text of the FLSA.

The DOL said it reconsidered the $47,476 standard set in 2016 in light of the district court's decisions, some 214,000 public comments received in response to a request for public input in 2017 and feedback received at a series of listening sessions the DOL held around the country in 2018. It said:

To address the district court's and the Department's concerns with the 2016 final rule and set a more appropriate salary level, the Department proposes to rescind formally the 2016 final rule and simply to update the 2004 standard salary level by applying the same methodology to current data. The 2004 final rule set the standard salary level at approximately the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (then and now the South) and in the retail sector. This proposed rule would do the same.

Employers who have exempt employees under the proposed new minimum salary and compensation thresholds will need to follow developments closely and begin considering their options, which may include converting certain exempt employees to non-exempt status or raising pay levels to meet the new thresholds. Keep in mind that pay is only part of the equation for these exemptions—employees must also perform duties that qualify for exempt status under the regulations.

For additional information about this blog, please contact your Poms & Associates broker, or send your question to us through “Ask Poms.”

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