On March 7, 2019, the U.S. Department of Labor (DOL) announced the long-awaited Notice of Proposed Rulemaking (NPRM) which proposes updates to the required salary amounts used to determine eligibility for certain exemptions from the FLSA overtime requirements. The new proposal seeks to formally rescind the 2016 final rule, and replace it with one that uses current wage data 1 to strike a better balance between the current salary level threshold ($455/week) and the dramatic increase proposed under the Obama Administration ($913/week). You can view our client alert from January 28 for a summary of the tortured history of this rule and the legal battle that has ensued.
The DOL's NPRM includes the following:
- Increasing the minimum salary required for an employee to qualify for exemption from the currently-enforced level of $455 to $679 per week (equivalent to $35,308 per year) 2;
- Increasing the total annual compensation requirement for "highly compensated employees" (HCE) from the currently-enforced level of $100,000 to $147,414 per year;
- Periodic reviews, every 4 years, to update the salary threshold. Unlike the proposal under the Obama Administration, these would not be automatic updates. Any changes would require notice-and-comment rulemaking; and
- Allowing employers to use 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 DOL estimates that the proposed changes to the minimum salary thresholds would make approximately 1.1 million employees who are currently classified as exempt eligible for overtime pay. To help employers navigate next steps, this alert takes a deeper dive into the some of the elements of the proposed rule and reviews items employers should consider when evaluating how the NPRM may impact their workforce.
Use of Non-Discretionary Bonuses and Incentive Payments
The NPRM sets forth the following parameters for use of bonus and incentive payments:
- 90% of the standard salary level ($611.10/week) must be paid each workweek; and
- If at the end of the 52-week period the salary level threshold of $35,308 is not achieved, the employer may issue a "catch-up" payment to reach this threshold provided it is paid within one pay period after the end of the 52-wwk period.
Highly Compensated Employee Exemption (HCE)
In regard to the HCE salary requirements, the DOL proposes the following:
- Employees must be paid the standard salary level each workweek ($679). Although non-discretionary bonuses and incentive payments cannot be used to satisfy the standard salary level, employers can use these payments for the remainder of the employee's total annual compensation needed to satisfy the HCE exemption ($147,414);
- "Catch-up" payments are permitted within the last pay period or within one month after the end of the 52-week period; and
- Employees working less than a year may qualify for the HCE exemption if they receive a pro-rata portion of the total annual compensation based on number of weeks worked.
The NPRM was published in the Federal Register on Friday, March 22, 2019. This triggers the 60-day comment period and interested parties will have until May 21, 2019 to submit comments to the DOL. A final rule, which may contain minor changes and/or clarifications, will be published after the DOL considers submitted comments. The DOL anticipates a final rule will become effective around January 2020 (barring more litigation).
Next Steps and Considerations for Employers
The note and comment regulatory process gives employers valuable time to carefully prepare for the final rule. Employers will need to consider whether to: (i) raise the salary level to maintain an exemption from overtime; (ii) use non-discretionary or incentive payments to achieve the new salary thresholds; (iii) evaluate more complex (and often improperly administered) pay structures like salaried non-exempt or fluctuating workweek methods; and/or (iv) change employee classifications to non-exempt and monitor work schedules and overtime.
In so doing, employers should consider the following:
- Analyze the cost/benefit associated with using a non-discretionary bonus or incentive payment to satisfy a portion of the salary threshold. Our recommended best practice is to set forth these agreements in writing, but the requirements of the proposed rule may result in less flexibility in structuring the bonus or incentive program (including loss of deductions and/or claw back provisions where permitted).
- Consider pay equity/pay compression issues. If salaries will be increased to maintain an exemption, review how this increase may impact your compensation structures.
- Examine whether your exemption classifications will withstand scrutiny under the job duties test. The NPRM does not alter the job duties test, but changes to the minimum salary thresholds provide an excellent opportunity to review job duties so you can proactively address any questionable exemption classifications.
- Examine whether the exemption classifications changes impact eligibility for fringe benefits like vacation, sick leave, or PTO. Are any changes needed to your employee handbook?
- Determine whether to provide additional training for reclassified employees and their managers to ensure they understand timekeeping requirements and do not intentionally or otherwise encourage work off-the-clock (e.g., responding to emails after hours).
Finally, it is also critical to consider whether there are any applicable state law requirements impacting exemption classifications. Several states either have (e.g., New York, California) or are considering (e.g., Washington, Pennsylvania) salary level thresholds that are higher than what is currently being proposed by the DOL, and as a result these changes will not impact what employers do in those states. Some states also do not recognize the HCE exemption and have state-specific nuances to the job duties test as well. Remember, exemption classification changes may also implicate meal and rest break or other state wage/hour compliance requirements.
The good news is that employers have several months to conduct the review described above.
1 The DOL based the new salary levels on the 20th percentile of earnings for full-time salaried workers in the lowest-wage Census region (the South) and/or the retail sector.
2 The DOL also proposed special salary levels for Puerto Rico, Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands ($455/week), American Samoa ($380/week), and the Motion Picture Industry ($1,036/week).
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.