Exempt employees would have to be paid a minimum annual salary of $35,308 in order to be exempt from the overtime and record keeping requirements of the Fair Labor Standards Act, under the Department of Labor’s long-awaited proposed new rule. The proposed new salary threshold represents almost a 50% increase over the current threshold of $23,660 but is substantially less than the 2016 threshold of $47,476 adopted under the Obama administration. A Texas court blocked the Obama era regulation from taking effect in November 2016, and the DOL later abandoned it.

As a result of the new threshold proposed by the Department of Labor on March 7, 2019, nearly 1.1 million employees previously exempt from overtime will likely become entitled to overtime based solely on their salary. The new regulation is now open for a 60-day public comment period, after which the DOL will issue a final rule. The final rule is not expected to go into effect until January of 2020, so employers have some time to prepare and adjust their policies and practices in anticipation of the change.

Exemptions Generally

To be properly treated as exempt, employees must be paid on a salary basis, and must also fall under one or more of the recognized exemptions under the FLSA. Those exemptions include the so-called white collar (executive, administrative and professional) and computer-related exemptions. The FLSA also has a “highly compensated individual” exemption, which many states do not have, and allows for a more relaxed application of the job duties test based on the higher salary.  In connection with that exemption, under the new regulation, an individual would need to be paid $147,414 (up from $100,000) to satisfy the salary threshold.

The DOL has established certain duties tests for each of the recognized exemptions. Unless employees are paid on a salary basis and meet the duties tests of one or more of the exemptions, employees still must be paid overtime if working more than 40 hours in a week.

Because the salary threshold has historically been relatively low, the main question for determining exempt status previously has been whether the job duties test was met. The new proposed rule now requires a more stringent review of the economic and business realities of maintaining certain positions as exempt, even if they otherwise meet the respective duties tests. Now, unless employees make at least $35,308 (or $147,414, for highly compensated employees), employers will likely be on the hook for overtime, even if those employees’ jobs otherwise qualify under white collar or highly compensated individual job tests. This is a significant change and may result in many positions being reclassified as non-exempt and subject to overtime and record-keeping requirements, as well as other protections that may be available under state law. For example, in many states (such as California), the exempt nature of a position also impacts the obligation to provide meal or rest periods. Employers must also be careful to ensure compliance with both state and federal laws covering these employees.

Calculation Of The Salary Threshold

To help offset the increased salary threshold, the DOL has provided some relief to employers by allowing them, for the first time,  to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level, provided these payments are made on a quarterly or more frequent basis. Previously, the DOL required the entire salary level to be satisfied proportionally in each work week.

Nondiscretionary bonuses and incentive payments are generally defined as forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. These may include individual or group production bonuses, bonuses for quality and accuracy of work, and commission payments. Being able to include a portion of this form of compensation in determining the minimum threshold could help to defray some of the increased salary costs, but the minimum is still a substantial increase over the prior rule.

More specifically, under the new rule, if an employer applies a non-discretionary bonus or incentive pay towards the salary threshold, at least 90% of the salary ($611 per week) must be paid as a salary, while up to 10% of the salary ($68 per week) may be satisfied with non-discretionary bonuses or incentive payments. If an employee does not earn enough of a non-discretionary bonus or incentive payment in a given quarter to meet the standard salary level, the DOL is allowing an employer to make a “catch-up” payment no later than the next pay period after the end of the quarter. Any such “catch-up” payment counts only toward the prior quarter’s salary.

Nondiscretionary bonuses and incentive payments may also be counted toward the $147,414 total annual compensation minimum for highly compensated employees, but only so long as the employer pays at least the full standard salary level of $679 per week. If an employee’s total compensation in a given annual period fails to meet the $147,414 threshold, the DOL is also allowing an employer to make a “catch-up” payment within one month of the end of the annual period. Any such catch-up payment counts only toward the prior year’s total annual compensation. If such a catch-up payment is not made within the time frame allotted, the exemption is lost for the prior quarter and the overtime premium must be paid.

What To Do

Given the increase in the salary threshold, employers have a range of options to ensure compliance. Specifically, employers may (a) raise salaries to maintain the exemption, (b) pay current salaries but now include payment of overtime for hours worked in excess of 40 hours in a given workweek, (c) adjust/reduce wages to reallocate it between regular wages and overtime so that the total amount paid is relatively the same, or (d) reorganize workloads, spread/eliminate work hours, and/or adjust schedules. If an employer chooses to pay current salaries with overtime after 40 hours, the employer will need to ensure it has a method in place for the employees to track and record their hours.

Under the new regulations, the DOL will also review the salary threshold every four years, beginning on January 1, 2020, using a similar notice and comment process.

As if the above is not enough to put employers on edge, the new overtime rule is in line with a mounting national trend towards increasing wages for lower paid workers. Two of the largest marketplaces – New York and California – passed legislation to raise the states’ minimum wage to $15.00 per hour, and parts of New York have already implemented that increase.  These types of changes may then have a ripple effect and, directly or indirectly, impact other wage obligations that employers may have under applicable state laws. Increases in the minimum wage combined with the new overtime rules will likely increase labor costs for many employers and require tough decisions regarding the composition, scope, and location of their workforce. Therefore, it will be important for employers to prepare for the effect of the new overtime rule and any other wage-related legislation in effect or on the horizon.