United States: DOL Announces Its Highly Anticipated Rule To Increase The Minimum Salary Threshold For Overtime Exemptions

Last Updated: March 21 2019
Article by Amy J. Traub and Ashlee C. Grant

Last Thursday, the Department of Labor (DOL) announced its Notice of Proposed Rule Making that would increase the minimum salary level necessary for employees to be exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). Citing "common sense, consistency, and [bringing] higher wages to working Americans," the proposed rule would increase the minimum salary from $455 to $679 per week ($35,308 annually, up from $23,660) and is anticipated to take effect in January 2020.

The Current Overtime Rule and Minimum Salary Threshold Have Remained Stagnant Since 2004

The FLSA requires employers to pay employees overtime for all hours worked over 40 hours in a single workweek. The statute exempts from this overtime requirement "any employee employed in a bona fide executive, administrative or professional capacity." The DOL regulations establish three criteria for employees to qualify for this exemption:

  • The employee must be paid a predetermined and fixed salary that is not subject to reductions because of variations in the quality or quantity of work performed.
  • The employee must be paid a specified weekly salary of at least $455.
  • The employee must primarily perform executive, administrative or professional duties.

The $455 per week minimum salary threshold has remained unchanged since the DOL's passage of these regulations in 2004.

In 2014, President Barack Obama opined that the DOL's overtime regulations "have not kept up with our modern economy." During his 2017 confirmation hearing, Labor Secretary Alexander Acosta affirmed these sentiments, describing it as "unfortunate" that the minimum salary value could remain in place for more than 10 years without any adjustments.

Indeed, there has been consensus between employer and employee interest groups that the current minimum salary threshold is too low in light of inflation and the increasing cost of living across the country. There has been disagreement, however, about the appropriate amount of increase.

The New Rule Will Increase by 5- Percent the Minimum Salary Basis for White Collar Exemptions and Annual Salary Requirement for Highly Compensated Employees

Most notably, the DOL's new rule will increase the minimum salary required for an employee to qualify as exempt from the FLSA's overtime requirements to $679 per week, which equates to an annual salary of $35,308. In addition, the new rule:

  • Boosts the total annual compensation requirement for employees to qualify for the "highly compensated employee" exemption from $100,000 to $147,414 per year.
  • Permits employers to use nondiscretionary bonuses and incentive payments, including commissions and other payments tied to productivity and profitability, paid on at least an annual basis, to satisfy 10 percent of the minimum salary threshold.
  • Commits the DOL to conducting periodic reviews of the minimum salary threshold in order to update the amount to keep it in line with future wage rates and inflation, although any future increases would not be automatically implemented and would instead be subject to the notice-and-comment rule-making requirements.

Importantly, the DOL's proposed new rule does not make any revisions to the duties requirements of the overtime exemption rule.

The proposed new rule also does not change the regulations governing overtime for police officers, firefighters, paramedics, nurses and laborers such as nonmanagement production-line employees, and nonmanagement employees in maintenance, construction and similar occupations.

The New Proposed Rule Rescinds and Replaces the Obama Administration's 2016 Proposed Rule

This is not the first time the DOL has attempted to adjust the minimum salary level established in 2004.

In 2016, the DOL, under the Obama administration, published a new overtime rule that would have doubled the minimum salary threshold for exempt employees to $913 per week. The new rule was set to become effective Dec. 1, 2016, but on Nov. 22, 2016, just days before the rule's implementation, Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas issued a nationwide injunction blocking the implementation of the rule. Judge Mazzant later granted the state petitioners' motion for summary judgment, invalidating the revised regulations in their entirety.

Taking note of the fact that the 2016 new rule would double the minimum salary threshold amount, Judge Mazzant opined that the significant increase would result in a number of employees automatically becoming disqualified from the overtime exemption based on salary alone, effectively eliminating any consideration of whether the employee performed any bona fide executive, administrative or professional duties. Because Congress drafted the exemption to apply to employees based on the duties they performed, Judge Mazzant ruled, the DOL exceeded its authority in drafting a rule that would make the employees' pay the determinative factor in whether the employee qualified for the exemption.

Judge Mazzant took note, in addition to the 2016 rule's significant increase in the minimum salary amount, of the fact that under the new rule, nearly 4.2 million employees would have to be reclassified from salaried to hourly workers, which would cause employers to incur significant payroll, accounting and legal costs in order to comply with the new rule.

The DOL Estimates That Its New Rule Will Have Noticeably Smaller Economic Impact and Be Significantly Less Costly to Employers Than the Obama-Era Rule

In determining its proposed salary level, the Trump administration DOL applied the same method previously used to set the last successful DOL salary increase back in 2004 – namely, using the salary levels for the 20th percentile of earnings for full-time salaried workers in the lowest census region (the South) and in the retail industry nationwide. In a not-so-subtle nod to Judge Mazzant's rulings, the DOL noted that its 2004 methodology had previously withstood the test of time (and judicial scrutiny) and did not cause significant hardship or disruption to employers or the economy.

The new rule is expected to affect the exempt status of more than 1 million employees who are currently exempt from the FLSA's overtime requirements, which is significantly fewer than the 4.2 million anticipated under the 2016 Obama-era rule. Likewise, while the new rule is anticipated to result in approximately $120.5 million per year in direct costs to employers, the DOL notes that this is approximately $224 million less in costs per year than the anticipated costs to employers under the 2016 Obama-era rule. The DOL also anticipates that the new rule will prevent approximately 211 FLSA lawsuits each year, saving employers approximately $138.2 million per year in litigation costs.

Employers Should Begin Preparing Now for the Implementation of the New Rule in January 2020

The proposed rule is currently pending for publication. Once the rule is published, the public will have 60 days to comment on it. The DOL will then issue a Final Rule, taking all comments into consideration. The DOL expects that the Final Rule will ultimately take effect in January 2020.

Employers should begin preparing now to ensure that their payroll procedures comply with the new rule by first reviewing payroll and salary records to determine which employees would no longer be exempt under the higher salary requirements. For those employees, companies will need to decide whether or not to keep the compensation rates the same but begin paying these employees overtime for all hours worked over 40 in any given workweek or increase their annual salary to meet the new $35,308 salary threshold.

Employers are not limited solely to increasing annual salaries, however. The new rule does give employers the option of using annual bonuses and incentive payments to satisfy up to 10 percent of the salary threshold, including a yearly catch-up payment at the end of the year. Employers may not, however, use bonuses and incentive payments to meet the new minimum salary threshold for the highly compensated employee exemption.

Further, employers must remember to check state and local minimum salary thresholds, which must also be adhered to.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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