The Department of Labor (DOL) has issued a Notice of Proposed Rulemaking (NPRM) that it estimates would convert more than one million now overtime-exempt workers to non-exempt, overtime-eligible employees. Currently, the so-called “white collar” exemptions under the Fair Labor Standards Act (FLSA) provide that employees who are paid a salary of at least $455 per week ($23,660 per year) and primarily perform executive, administrative, or professional duties (the “job duties test”) need not be paid overtime. The NPRM would change this, by increasing the salary threshold. If adopted, the proposed rule would make other changes, too.
Under the proposed rule, the salary threshold necessary to qualify for a white collar exemption under federal law would be increased approximately 50% to $679 per week ($35,308 annually). If adopted, this rule will mean that employees who are now exempt under the executive, administrative, or professional (EAP) exemptions, but earn a salary less than $35,308 annually, will become non-exempt and will have to be paid their hourly rate + overtime premium for all time worked in excess of forty hours in a workweek. To avoid exposure to overtime pay for these employees, employers would be required either to increase the salary of each of these employees to at least the new threshold – potentially a nearly $12,000 per annum increase – or manage the employee’s schedule closely to ensure they do not work overtime. (Note, however, that several states have their own exemption criteria - sometimes including a different salary basis threshold (e.g., CA and New York). Employees in those states will need to meet both the FLSA and state requirements for exemption.)
The NPRM, which is , also proposes a nearly 50% increase in the total compensation threshold applicable to “highly compensated employees;” would allow employers to use non-discretionary bonuses and other incentive payments (including commissions) to meet a portion of the salary threshold, and contemplates periodic reviews to consider updating the salary threshold. Importantly, however, the NPRM does not propose automatic adjustments to the salary basis threshold and does not make any changes to the job duties test. The NPRM is discussed in more detail below.
Past is Prologue: A Brief Review of History
Before reviewing the key provisions of the proposed rule, let’s revisit some basic tenets of the FLSA and some recent history. First, under federal law, employees are entitled to be paid overtime for all hours they work in excess of forty hours in any workweek, unless they are eligible for one of the exemptions from the overtime pay requirements. There are many exemptions, but the most common and widely applicable exemptions are the EAP or “white collar” exemptions. Under these exemptions, an employee is not eligible for overtime if they perform the job duties specified in the regulations and are paid on a salaried basis (not hourly) at the rate of $455 per week. In addition, “highly compensated employees,” which currently means employees earning total compensation of at least $100,000 per year, are exempt from the overtime pay requirements if they perform just one (rather than all) of the job duties specified in the regulations for the executive, administrative, and professional exemptions.
The current salary basis threshold of $455 per week and the highly compensated employee threshold of $100,000 have been in place since 2004. Almost three years ago, more than doubling the salary basis threshold and substantially increasing the highly compensated employee threshold. A few weeks before that rule was to take effect in December 2016, . After the election of President Trump, the DOL announced it would withdraw the Obama-era rule, not fight the court’s injunction, and begin a new rule-making process. The NPRM issued yesterday is a result of that new process. Not surprisingly, the proposed increase in the salary basis threshold is now “only” 50% vs. the 2016 proposed increase of more than 200%. Interestingly, however, yesterday’s NPRM actually proposes a higher threshold for highly compensated employees than had been proposed in 2016, recommending it be increased from $100,000 to $147,414, which is about $13,000 higher than the threshold proposed by the Obama-era DOL.
Key Provisions of the NPRM
- Increases the Salary Threshold for White Collar Exemptions to $679 per week ($35,308 annually). The NPRM would establish a salary threshold for the white collar exemptions at $678 per week, or $35,308 annually. This threshold is equal to approximately the 20th percentile of compensation levels currently paid in the U.S., with a slight increase for anticipated inflation between now and early 2020 when the proposed rule is projected to become effective.
- Allows Employers to Use Nondiscretionary Incentive Compensation to Meet up to 10 Percent of the New Salary Threshold. Addressing a longstanding complaint from employers who pay employees nondiscretionary bonuses and incentive compensation, including commissions, the NPRM would allow employers to use nondiscretionary bonuses, commissions and other incentive payments to satisfy up to 10 percent of the new salary threshold. This means that employers could pay an exempt employee a salary of $611.10 per week (90% of $678) and make up the difference in non-discretionary bonuses and incentive payments during the year. If, at the end of each 52-week period, the employee’s salary plus nondiscretionary bonuses and incentive compensation did not equal at least the salary basis threshold of $35,308, the employer would have one pay period to make a catch-up payment to bring the year’s compensation (base salary + nondiscretionary bonuses and other incentive payments) to the $35,308 threshold.
- Increases the Total Annual Compensation Threshold for Highly Compensated Employees to $147,414 per year. The NPRM proposes a compensation threshold for highly compensated employees (HCE) of $147,414 annually. As noted above, the current threshold is $100,000 per year. For HCE purposes, the threshold can be met through a combination of base salary, nondiscretionary bonuses, commissions, and other nondiscretionary compensation, provided that the HCE is paid at least $679 per week in base salary. The employer can also make a year-end catch-up payment to the HCE if necessary to meet the HCE total annual compensation threshold.
- No Changes to the Duties Test. Importantly, the NPRM does not propose any changes to the current duties tests applicable to the EAP exemptions.
- No Automatic Increases in the Salary Thresholds. The NPRM includes a commitment to review the salary basis and HCE thresholds every four years. But, unlike in the Obama-era rule proposed in 2016, there will not be automatic increases in accordance with inflation and pay data. Instead, DOL will review the thresholds every four years, and consider new rulemaking adjusting the thresholds at that time.
What Should Employers Do Now?
The NPRM is only a proposal. There will be a comment period and time for DOL to consider the comments before publishing a final rule. Moreover, the final rule may differ from the proposed rule in material respects. The DOL’s NPRM seems to be targeting early 2020 as the effective date for the final rule, as it established the proposed salary threshold based on DOL’s projection of the 20th percentile of all compensation as of January 2020.
While there may be further tweaking in the salary and HCE thresholds, it is likely that both will be increased. Consequently, employers should be reviewing how they compensate their employees currently and begin thinking about the changes they may need to make when a Final Rule is announced. Keep in touch with counsel on the status of the proposed rule and seek legal advice before making changes to ensure continued compliance with federal law.