The final rule changes the minimum salary test and modifies the duties tests for the administrative, executive and professional exemptions to align those tests with the duties tests for the corresponding exemptions under the FLSA.

On October 16, 2019, the Pennsylvania Department of Labor and Industry (PA DOL) proposed changes to the Pennsylvania Minimum Wage Act’s (PMWA) so-called white-collar exemptions (i.e., administrative, executive and professional exemptions). On October 17, 2019, PA DOL issued its final rule to go into effect on January 1, 2020, subject only to the anticipated approval in November 2019 by the Pennsylvania Independent Regulatory Review Commission. The proposed changes in the final rule impact the white-collar exemptions in general and specifically would substantially increase the minimum salary requirement for these exemptions.

Background

In order to classify an employee as exempt from the PMWA’s overtime and minimum wage requirements pursuant to one of the white-collar exemptions, the following three tests must be met: (1) minimum salary test; (2) salary basis test; and (3) duties test. These tests under the PMWA currently are similar to, but in some key respects differ from, the tests for the white-collar exemptions under the federal Fair Labor Standards Act (FLSA).

On September 24, 2019, the U.S. Department of Labor issued a final rule that modifies the salary level requirements of the FLSA’s white-collar exemptions, effective January 1, 2020. Under that federal final rule, the minimum salary threshold for white-collar exemptions under the FLSA generally will increase from $455 to $684 per week (or $35,568 per year).

Key Provisions of the New Overtime Rule

The final rule issued by the PA DOL changes the minimum salary test and modifies the duties tests for the administrative, executive and professional exemptions to align those tests with the duties tests for the corresponding exemptions under the FLSA.

Minimum Guaranteed Salary

On the assumption that the final rule is approved, the minimum salary threshold for the PMWA’s white-collar exemptions will increase as follows:

  • January 1, 2020: $684 per week ($35,568 per year)
  • January 1, 2021: $780 per week ($40,560 per year)
  • January 1, 2022: $875 per week ($45,500 per year)

As with the minimum salary threshold under the FLSA, under the final rule up to 10 percent of the minimum salary can be comprised of nondiscretionary incentive compensation, bonuses and commissions.

Scheduled Updates to the Minimum Salary Thresholds

In addition, the PA DOL’s final rule requires automatic increases in the minimum salary threshold every three years, with employers being provided only 30 days’ advance notice of the amount of the increase. The first automatic increase would be in 2023, which means that Pennsylvania employers will see the minimum salary increase four years in a row.

Duties Tests

The PA DOL final rule also aligns the duties test for the PMWA’s administrative, professional and executive exemptions with the corresponding exemptions under the FLSA. However, as discussed in the lengthy preamble to the final rule, the PA DOL declined to:

  • Adopt the computer or highly compensated employee exemptions available under the FLSA. As a result, these exemptions remain unavailable to Pennsylvania employers.
  • Align the PMWA’s outsides sales exemption with the FLSA’s outside sales exemption. Accordingly, Pennsylvania employers invoking the outside sales exemption will continue to need to meet the more stringent requirements of the PMWA exemption.
  • Define salary basis, primary duty or other important terms that are used in both the PMWA and FLSA white-collar exemptions, but defined only in FLSA regulations.

Requirements Under Other State Wage-and-Hour Laws

It is important to remember that states other than Pennsylvania have, or will have, minimum salary thresholds for state law white-collar exemptions that are higher than the minimum salary threshold under the FLSA. By way of example only:

  • California and New York have significantly higher minimum salary thresholds for those states’ white-collar exemptions.
  • On June 5, 2019, the Washington Department of Labor proposed substantial increases to the state’s minimum salary.
  • On October 24, 2019, Michigan Governor Gretchen Whitmer directed the state Department of Labor and Economic Opportunity to submit a request for rulemaking to expand the right to overtime pay to more Michigan workers, stating that the pending higher minimum salary under the FLSA was too low.

In light of the salvo of state laws in other areas of employment law in recent years, such as pay equity, salary bans and paid sick leave, it is reasonable to expect more states to increase their minimum salaries as well.

What This Means for Employers

Wage-and-hour compliance remains an important concern for employers. Noncompliance with the state or federal wage and hour law can result in significant liability, along with potentially negative effects on reputation, morale and recruitment efforts.

In light of the PA DOL’s final rule, the key question that Pennsylvania employers will need to decide with exempt employees currently earning below the new minimum salary is whether to raise their salaries to retain their exempt status or to convert them to nonexempt status. While the near-term (i.e., before January 1, 2020) considerations will be similar to those needed for compliance with the FLSA given that the minimum salary thresholds under the PA DOL final rule and the federal final rule will be the same effective January 1, 2020, Pennsylvania employers should keep in mind the future scheduled increases applicable only to the minimum salary threshold under the PMWA.

The final rule also highlights the importance for employers to understand that employees get the benefit of federal or state law, whichever is more favorable. That is particularly significant for employees in jurisdictions such as California and New York that have higher minimum salary thresholds for white-collar exemptions (as referenced above).

Employers should anticipate that the PA DOL final rule will go in effect on January 1, 2020, and plan accordingly.