Alert 05.19.16
U.S. Department of Labor More Than Doubles Minimum Salary Levels for FLSA Overtime Exemptions
Employers have six months to come into compliance—changes projected to impact 4.2 million exempt employees.
Alert
Alert
03.18.19
On March 7, 2019, the U.S. Department of Labor (DOL) issued its much-anticipated Notice of Proposed Rulemaking (NPRM) for amending the federal Fair Labor Standards Act (FLSA) regulations for exemptions from overtime pay requirements for the so-called “white collar” exemptions. The Obama Administration had previously published a regulation that would have more than doubled the minimum salary level for executive, administrative, and professional employees to be classified as exempt from overtime and minimum wage requirements (the EAP exemption) and increased the minimum salary level by a third for highly compensated employees (the HCE exemption), with further automatic increases every three years (the “2016 Final Rule”). On November 22, 2016, just nine days before that regulation would have become effective, a United States District Court in Texas issued a nationwide preliminary injunction against enforcement of the 2016 Final Rule, followed by a permanent injunction on Aug. 31, 2017. The current salary minimum for the EAP exemption is $23,660, below the federal poverty level for a family of four, and there was widespread support among both employers and employees for increasing that minimum. Until publication of the NPRM, however, uncertainty reigned about what level the Trump Administration’s DOL would propose. For EAP employees, the DOL has proposed a minimum salary level almost at the midpoint between level sought by the 2016 Final Rule and the current level, and it has proposed raising the minimum salary for highly compensated employees above the salary level first stated in the 2016 Final Rule.
In this NPRM, the DOL proposes to formally rescind the 2016 Final Rule. It asserts that its new proposed rule that has been formulated “using a longstanding commonsense methodology” and that is “based on broad-based input.” The Proposed Rule would increase the minimum salary level required for the EAP exemption to $35,308 annually and for the HCE exemption to $147,414 annually. The NPRM also proposes setting a new four-year cycle for increases in the minimum salary level, but through a notice-and-comment process rather than automatically. The DOL estimates that, under this change, 1.3 million currently exempt employees would become nonexempt under the proposed changes. Members of the public may submit comments on the NPRM on or before May 6, 2019.
Key Provisions of the NPRM
Background
The FLSA mandates that employers pay employees a minimum hourly wage and also pay premium overtime at 1.5 times the employee’s regular rate for all hours worked over 40 in a workweek, unless the employees are classified as exempt from these requirements. The EAP regulations set forth tests for exemption from these requirements. For an employee to qualify for the EAP exemption, three tests must be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount, currently set at $455 per week (or $23,660 annually) (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”). For an employee to qualify for the HCE exemption, the employee (1) must earn a total annual compensation of $100,000 or more, which includes at least $455 per week paid on a salary basis; (2) must have primary duties that include performing office or non-manual work; and (3) must customarily and regularly perform at least one of the exempt duties of an EAP exempt employee.
The current required salary and compensation levels were set by the DOL in a 2004 Final Rule. An appeal to the United States Court of Appeals for the Fifth Circuit of the injunction against and invalidation of the 2016 Final Rule is being held in abeyance. Currently, the DOL is enforcing the salary and compensation levels set back in 2004.
The new NPRM was developed after consideration of the District Court’s decisions, public comments received in response to a request for information issued by the DOL in 2017, and feedback received at public listening sessions held by the DOL around the country. Ultimately, the DOL has issued the NPRM proposing to increase the minimum salary level for the EAP exemption by almost 50 percent above current levels, almost at the midpoint between current level and the level set in the 2016 Final Rule.
What Employers Should Do Now
Employers and other members of the public are encouraged to submit comments on any aspect of the NPRM of concern to them. For planning purposes, however, employers should review how the new salary levels will impact their business and their employees if the proposed levels are adopted in a final regulation.
The first step is reviewing the salary levels of employees who are currently classified as exempt employees but earn less than projected new minimum of $35,308 annually—or, if the exemption is based solely on being classified as a highly compensated employee, earn less than the projected $147,414 annual minimum compensation. Employers should require employees in this cohort to start keeping records of the hours they work each week. This information will allow employers to evaluate the comparative costs of paying those employees overtime premium pay or increasing the employees’ salary to the new minimum levels. Employers that are unable to increase payroll costs may need to limit the overtime hours worked by these employees and consider transferring some of their duties to other exempt employees earning above the new minimum salary level.
Employers may consider several strategies for implementing these changes:
- Reconsider frequent staff meetings that consume work time.
- Evaluate whether travel to an in-person meeting is necessary or whether a video conference call or use of shared-screen technology may be sufficient.
- Scrutinize whether and how many non-exempt employees need to participate in calls or meetings.
Finally, employers should also keep in mind that some states and localities, including California and New York state, will continue to set a higher bar for exempt classifications under more stringent duties tests or higher minimum salary requirements.