On March 7, 2019, The United States Department of Labor (DOL), announced a proposal to update the overtime rules under the Fair Labor Standards Act (FLSA).
Under the FLSA, employers are required to pay employees at least the minimum wage for all hours worked, and overtime pay (at 1 ½ times an employee’s regular rate) for all hours worked in excess of 40 in a workweek. To be exempt from these requirements, an employee must be paid on a salary basis, at or above a set minimum weekly salary level, and meet certain specific requirements concerning their job duties.
In March 2014, President Obama directed the DOL to update and modernize regulations under the FLSA governing overtime exemptions for “white collar” employees (i.e., executive, administrative and professional employees). After receiving more than 270,000 comments, in May 2016, the DOL issued a final rule, substantially increasing the minimum salary levels for the overtime-exempt classifications, from $455 per week ($23,660 per year) to $913 per week ($47,476 per year), and incorporating mechanisms to adjust the salary level in the future (“2016 Rule”).
Under the 2016 Rule, the salary level needed to satisfy the highly compensated employee (HCE) exemption (which includes a less stringent “duties” test), was set at $134,004 (increased from the $100,000 threshold in effect since 2004). The rule was scheduled to go into effect on December 1, 2016. The United States District Court for the Eastern District of Texas, however, declared the 2016 Rule invalid, and an appeal to the United States Court of Appeals for the Fifth Circuit was held in abeyance pending the DOL’s reassessment of its position, including accepting public comments through a July 26, 2017 request for information (RFI).
After receiving comments responsive to the RFI, feedback received at public sessions held by the DOL throughout the United States, and the district court’s decision, the DOL has now proposed to formally rescind the 2016 Rule setting the minimum overtime-exempt salary level at $913 week. It has proposed instead a new rule that: increases the minimum salary level from $455 per week to $679 per week ($35,308 per year), permits employers to include non-discretionary and bonus payments to satisfy up to 10% of the minimum salary level, and provides for a “catch-up” period if the employee’s compensation does not meet the minimum level. (The 2016 Rule also permitted the inclusion of incentive payments, and provided for a “catch up” period).
The DOL updated the compensation requirements for the HCE exemption, from the currently enforced $100,000 annual salary to $147,714.
Unlike the 2016 Rule, the proposed rule does not include automatic adjustments to the minimum compensation levels. The DOL, however, has stated its intent to update the salary levels every four years, after notice and comment rulemaking. The proposed rule is subject to a 60-day comment period.
Employers also must be mindful of minimum salary levels set under state wage and hour laws, which in some cases, are higher than those set under federal law (e.g., in New York, the current minimum salary threshold for exempt administrative and executive employees ranges from $832 per week ($43,264 per year) to $1,125 per week ($58,500 per year) depending on where the employees work, and, in certain instances, the number of individuals employed by a company.
The proposed rule is not yet final, and thus no effective date has been set. In anticipation of a final rule, employers may want to evaluate their currently exempt employees, who earn below the proposed new compensation threshold, and start considering whether to increase wages for these employees or reclassify such employees as non-exempt should the proposed rule become effective.
To the extent employers choose to reclassify, they will need to: (1) have systems in place to track employee time (which may involve implementing new time-keeping policies), (2) address potential additional wage costs (e.g., for compensable travel time, overtime, the inclusion of bonus payments in an employee’s regular rate of pay to calculate overtime), (3) determine how and when to best communicate any reclassification to affected employees; (4) consider and address the potential impact of any potential reclassification on employee morale; (5) evaluate whether such employees are performing after-hours work (e.g., answering calls from their employers or clients, responding to work-related texts and emails, posting on social media in connection with their job duties, performing work remotely, etc.), (6) train human resources and managers to ensure employee time is tracked correctly and employees are paid properly, and (7) consider other pay structures such as a fluctuating work week method of payment. Employers may also decide to limit overtime to manage costs, hire part-time workers to offset overtime, consider changes to benefits offered, and/or outsource certain work.
The proposed rule does not include any changes to the applicable job duties tests used to determine whether an employee qualifies for one of the white collar overtime exemptions apart from the minimum compensation requirement.
For answers to any questions regarding this blog please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.