Blogger: Erin J. Webb
ewebb@kaycasto.com
Employers have been waiting with great anticipation for the new changes to the overtime exemption rules under the Fair Labor Standards Act since the final rule issued by the Department of Labor under the Obama Administration, in May 2016, was enjoined nationwide by a federal court later that year. The wait is over. On March 7, 2019, the Department of Labor issued its Notice of Proposed Rulemaking (NPRM), which includes a salary-level threshold change that will make more than a million American workers, who previously were exempt, eligible for overtime pay, absent some intervening action by their employers.
Erin J. Webb
Under the Fair Labor Standards Act (FLSA), workers performing certain executive, administrative, and professional duties, and earning a certain minimum salary, have long been exempt from overtime rules. To qualify for these so-called “white-collar exemptions,” an employee must: (1) be paid on a salary basis; (2) be paid a salary not less than the requisite minimum under the regulations (i.e. the salary-level threshold); AND (3) perform bona-fide executive, administrative, or professional duties as defined by the regulations.
The new proposed rule will increase the salary-level threshold for the white-collar exemptions to $35,308 per year ($679 per week), a significant increase from the threshold currently enforced, $23,660 per year ($455 per week). Absent meeting an exemption, employees covered by the FLSA are overtime eligible and must receive at least one and one-half times their regular rate of pay for all hours worked over 40 in a workweek.
Other changes of interest in the NPRM include:
- An increase in the total annual compensation requirement for “highly compensated employees” (HCE) to $147,414 per year (from the currently enforced level of $100,000 per year);
- No automatic adjustments to the salary-level threshold, but a “commitment to periodic review to update the salary threshold” (any update would continue to require notice-and-comment rulemaking); and
- Permitted use of nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.
The proposed rule will not change overtime protections for police officers, firefighters, paramedics, nurses, certain laborers, and non-management employees in maintenance, construction, and similar occupations; nor will it change the job duties test for the white-collar exemptions.
According to the Department of Labor, it “received extensive public input from six in-person listening sessions held around the nation and more than 200,000 comments that were received as part of a 2017 Request for Information (RFI). Commenters who participated in response to the RFI or who participated at a listening session overwhelmingly agreed that the currently enforced salary and compensation levels need to be updated.” The current salary-level threshold was set in 2004.
While the new rule will require some strategic decision-making for employers, there is time. The public will have 60 days to comment on the proposed regulation from the date of its publication in the Federal Register, which is expected to happen this week. The DOL will consider all timely comments in developing a final rule.
In the meantime, employers should begin thinking about the employees within their workforces who potentially will be affected—i.e. those workers who are currently classified as overtime exempt pursuant to the white-collar exemptions, but who are currently making less than $679 per week, the new proposed salary-level threshold. Strategic decisions will need to be made with regard to this subset of their workforces—namely, whether to reclassify these employees as non-exempt, overtime-eligible employees and prepare to begin paying them overtime for all hours worked over 40 in a workweek, or to increase these employees’ salaries to at least $679 per week so that they meet the new salary threshold. In conjunction with this, employers may consider implementing strict overtime policies to curb the amount of overtime that would be worked.
These decisions likely will be impacted by how close (or how far, as the case may be) each affected employee’s salary level is to the new threshold, versus how many hours over 40 in each workweek the employee works. For example, an employee who is making just above the current salary-level threshold of $455 per week, but who does not typically work more than 40 hours in a workweek, may be a good candidate for reclassification to hourly, overtime-eligible status, as the occasional or minimal overtime cost would be, at least in theory, much lower than the cost of increasing that employee’s salary to the new threshold in order for the employee to remain exempt. Contrast that with an employee whose salary is much closer to the new threshold, and who regularly works more than 40 hours in a workweek. In that scenario, providing the employee with a modest salary increase to meet the new threshold in order to keep him or her overtime-exempt may make the most sense. As employers can expect, the more difficult decisions lie with the employees who fall somewhere in between those two ends of the spectrum.
In addition, employers should consider conducting self-audits, from time to time, which can catch classification errors before a complaint is made or suit is initiated. Keep in mind that, salary requirements aside, meeting the duty requirements of an overtime exemption rule is another critical component of properly classifying an employee as exempt under the FLSA. Generally, to satisfy the duties test for:
- the executive exemption, the employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; the employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and the employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight;
- the administrative exemption, the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers and include the exercise of discretion and independent judgment with respect to matters of significance;
- the professional exemption, the employee’s primary duty must be the performance of work requiring advanced knowledge—defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment—in a field of science or learning and must be customarily acquired by a prolonged course of specialized intellectual instruction.
More information regarding the Notice of Proposed Rulemaking and the overtime exemption regulations is available on the Department of Labor, Wage and Hour Division’s website. The DOL is encouraging any interested members of the public to submit comments about the proposed rule electronically at www.regulations.gov, in the rulemaking docket RIN 1235-AA20. For more information, visit:
https://www.dol.gov/whd/overtime2019/index.htm
https://www.dol.gov/whd/overtime/FSOT2019.pdf
https://www.dol.gov/whd/overtime/fs17a_overview.htm
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