On March 7, 2019, the U.S. Department of Labor (the "Department" or "DOL") issued its long-awaited proposal to increase the salary threshold for employees to be classified as exempt from the minimum wage1 and overtime requirements of the federal Fair Labor Standards Act (the "FLSA"). Under this DOL proposal, the minimum salary for exempt status would increase from $455 per week ($23,660 annually) to $679 per week ($35,308 annually). This means that employees who make less than approximately $35,000 per year would be automatically eligible for overtime in the amount of one and one-half times their regular hourly rate for all hours worked in excess of 40 in a workweek. The DOL estimates that increasing the salary threshold will make about 1.1 million additional workers eligible for overtime. Alternatively, employers can increase the salaries paid to exempt employees who currently earn at least $455 per week but less than $679 per week.
The Federal Regulations
Bona fide executive, administrative or professional employees are exempt from the overtime requirements of the FLSA. Generally, there is a three-part test to determine exempt status:
- the employee must be paid on a salary basis (the "salary basis test");
- the employee must be paid at least the minimum salary level (the "salary level test"); and
- the employee must perform executive, administrative or professional capacity duties as established by the regulations (the "duties test").
The salary basis test requires that to be considered exempt, an employee generally must be salaried.2 Employees are salaried under the regulations if they regularly receive a predetermined amount of compensation that is not subject to reduction because of variations in the quality or quantity of work they perform. With limited exceptions, employees must receive their full salary for any week in which they perform any work, without regard to the number of days or hours worked.
If an employee satisfies the salary basis and salary level criteria, the final question is whether the employee performs executive, administrative or professional duties as established by the FLSA regulations.
The District Court's Decision
The proposed regulations would replace the Obama-era 2016 final rule that had raised the minimum salary for exempt status to $913 per week ($47,476 per year); however, that rule was invalidated by the U.S. District Court for the Eastern District of Texas.3 The district court ruled that the $913 per week salary level was too high, thereby excluding too many individuals who would otherwise have been exempt from overtime. The court explained that the law establishing the exemptions clearly provides that the primary test for establishing exempt status is the duties test, and not the salary level test. The district court added the salary level was only supposed to set the "floor to screen out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary."4
The Proposed New Rule
In addition to increasing the basic salary threshold from $455 per week to $679 per week, the Department seeks to raise the minimum salary to qualify for the streamlined duties test for highly compensated employees. The DOL proposal raises the salary threshold from its current $100,000 per year level to $147,414. This amount is over $13,000 higher than the DOL's 2016 final rule. Under the highly compensated employee exemption, individuals who customarily perform only one of the exempt duties of an executive, administrative or professional employee are deemed exempt, provided that their salary meets or exceeds the minimum highly compensated employee threshold.
In an effort to align its regulations with current pay practices, the proposed rule permits employers to count non-discretionary bonuses and incentive payments, including commissions and non-discretionary incentive bonuses tied to productivity and profitability, to satisfy up to 10% of the standard salary level test, provided that those payments are made annually or more frequently. This is substantially similar to the 2016 final rule; however, the 2016 version required that such bonuses be paid at least quarterly to count toward the salary level.
The Department proposal permits employers to make a final "catch-up" payment within one pay period after the end of each 52-week period to bring an employee's compensation up to the required level. This means that each pay period an employer must pay the employee 90% of the standard salary level ($611.10 per week), and if at the end of the 52-week period the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 52 weeks ($35,308), the employer would have one pay period to make up for the shortfall (up to 10% of the standard salary level, $3,530.80). Any such catch-up payment would count only toward the prior year's salary amount and not toward the salary amount in the year in which it was paid.
Unlike the 2016 final rule, the new proposal does not set automatic, periodic increases of the salary threshold. In its place, the DOL is seeking the public's view on whether or not to update the salary level every four years, but each time only after notice and public comment.
The proposed rule does not seek to change the current duties test. A substantial amount of wage and hour litigation over exempt status turns on whether the individual satisfies the duties test, a fact-specific analysis. As a result, some had hoped that the new rule would update and simplify the duties test.
Anticipated January 2020 Effective Date
The 60-days' notice and public comment period is now open. The DOL anticipates issuing a final rule later this year and that rule becoming effective sometime in January 2020.
New York Regulation
New York employers should be reminded that the New York State Department of Labor ("NYSDOL") already has adopted regulations that increased the salary threshold for exempt employees in New York.5 Depending on the size and location of the employer within New York State, the NYSDOL regulations increase the minimum salary threshold, as follows:
- New York City large employer (11 or more): $1,125.00 per week ($58,500 annually);
- New York City small employer (10 or fewer): $1,012.50 per week ($52,650 annually); and $1,125.00 per week on and after December 31, 2019;
- Nassau, Suffolk and Westchester employers: $900.00 per week ($46,800 annually); $975.00 per week on and after December 31, 2019; $1,050.00 per week on and after December 31, 2020; and $1,125.00 per week on and after December 31, 2021;
- All other New York employers: $832.00 per week ($43,264 annually); $885.00 per week on and after December 31, 2019; and $937.50 per week on and after December 31, 2020.
Impact for Employers
The threshold salary levels currently in New York are higher than those proposed by the DOL under the FLSA. Although New York employers should continue to monitor the changes in the FLSA regulations, New York-based employers — regardless of size and location — currently meeting the applicable state standard will satisfy the salary level test proposed by the Department. Employers doing business in different states will need to check federal, state and perhaps even local requirements to ensure compliance. In addition, New York employers who do business in different counties will have to apply different salary thresholds, depending on the location and number of employees.
 Currently, the federal minimum wage is $7.25 per hour. On March 6, 2019, the House of Representatives Education and Labor committee approved a bill (H.R. 582), which would gradually increase the federal minimum wage to $15 per hour by 2024. This bill, which was advanced by Democrats along party lines, will now be considered by the House of Representatives; however, it is not clear how it will fare in the Republican-controlled Senate.
In New York State, the minimum wage is substantially higher. The minimum wage varies based on the size and location of the employer within New York State:
|NYC - Large Employers (of 11 or more)||$15.00|
|NYC - Small Employers (10 or less)||$13.50||$15.00|
|Nassau, Suffolk and Westchester Counties||$12.00||$13.00||$14.00||$15.00|
|Remainder of New York State||$11.10||$11.80||$12.50||*|
 Under certain circumstances, administrative and professional employees may be paid on a "fee basis."
 Nevada v. United States Department of Labor, Civ. Action No. 4:16-CV-731, 2017 WL 3837230 (D. Tx. Aug. 31, 2017).
 Id., at 8.
 12 NYCRR §142-3.12(c)(2)(i)(e).
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.