On March 7, 2019, the U.S. Department of Labor (DOL) announced its proposed rule to update the Fair Labor Standards Act’s (FLSA) overtime exemptions for executive, administrative and professional workers. The lengthy proposed rule, if finalized, could have a significant impact on employers that classify their workers as exempt under these “white collar” exemptions. This Alert highlights some of the key provisions of the new proposed rule.
Minimum Salary Threshold
The new proposed rule would increase the salary threshold for employees to qualify for the executive, administrative and professional exemptions under the FLSA from $23,660 ($455 per week) to $35,308 a year ($679 per week).
Employers may recall that, in 2016, the Obama administration attempted to raise the salary threshold for executive, administrative and professional workers to an even higher amount of $47,476. However, a federal judge enjoined the Obama administration’s proposed rule, leading to a lengthy appeals process. When the Trump administration inherited the appeal, it dropped its defense of the Obama-era rule, opting instead to issue its own rule with a lower proposed salary threshold.
Similar to the 2016 rule, the new proposed rule would allow employers to count certain nondiscretionary bonuses and incentive payments (for example, productivity and profitability bonuses and commissions) to satisfy up to 10 percent of the proposed required salary level. The proposed rule would also allow employers to make a “catch up” payment at the end of the year to bring an employee up to the proposed $35,308 minimum salary threshold. For example, if at the end of a 52-week period an employee’s salary plus nondiscretionary bonuses and incentive compensation do not equal at least $35,308, the proposed rule would allow an employer to make a catch-up payment (up to 10 percent of the standard salary level) within one pay period after the end of the 52-week period to bring the employee’s compensation to the minimum threshold level.
No Automatic Increases to Exempt Threshold
Notably, the new proposed rule does not include a controversial provision that was in the 2016 rule, which provided for the minimum salary level to automatically increase over time. Instead, it states an intention to review and update the minimum salary threshold every four years. The new proposed rule provides that any additional increase to the salary threshold must first go through the rulemaking process, including notice and comment periods.
Highly Compensated Employees Salary Threshold
Employers should also note the new proposed rule increases the salary threshold for the highly compensated employee (HCE) exemption from $100,000 to $147,414 per year. Under the current HCE exemption, employees who earn at least $100,000 per year are subject to a less stringent “duties” test than applies under the standard administrative, executive and professional employee exemptions.
Job Duties Tests
Notably, the proposed rule does not alter the current job duties tests necessary to qualify for a white-collar exemption under the FLSA.
What Employers Should Do
Once published in the Federal Register, the proposed rule will be subject to a 60-day public comment period. The final regulation is expected to become effective in January 2020, although we anticipate legal challenges to the rule may delay its effective date.
Employers should take this opportunity to review their classification of employees and determine how this rule may impact their businesses. This includes (1) reviewing the salary levels of employees currently classified as exempt under the executive, administrative or professional exemptions to determine whether they meet the new proposed annual minimum threshold, and whether any compensation adjustments will need to be made (or individuals will need to be reclassified) if the new rule becomes effective; (2) identifying any highly compensated employees who perform duties that make them exempt under the HCE exemption and determining whether reclassification or compensation adjustments may be necessary; and (3) consulting with counsel to develop a plan to address these changes if and when the new proposed rule goes into effect.