On Thursday, March 7, 2019, the United States Department of Labor (the DOL) released its newest Proposed Rule that, if implemented, would broaden federal overtime pay regulations to cover millions of additional workers who are currently exempt from overtime eligibility. Under the Proposed Rule, the DOL seeks to update the regulations governing which executive, administrative, and professional employees (the so-called “white collar” workers) are entitled to minimum wage and overtime pay protections under the Fair Labor Standards Act (the FLSA).
The FLSA requires employers to pay its “non-exempt employees” overtime (1 ½ the workers’ “regular rate of pay”) for all hours worked in excess of forty (40) per week. See 29 U.S.C. § 207. The DOL’s regulations implementing the FLSA sets forth a variety of employment classifications that are “exempt” from the FLSA’s overtime requirement—including employees performing executive, administrative, and/or professional job duties. Since the 1940’s, in order for an employee to qualify as an exempt “white collar” employee, he/she had to meet three “tests”: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid must meet a minimum specified amount; and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties (as defined by the regulations). The DOL last fully updated these regulations in 2004, setting the current minimum salary threshold at $455 per week (or $23,660 per year).
In May 2016, the Obama-era DOL attempted change to the overtime rule that would have doubled the minimum salary level for the so-called “white collar” exemption from $23,660 to nearly $48,000 per year. This proposal would have also increased the total annual compensation requirement needed to exempt “highly compensated employees” to $134,004 annually (previously set at $100,000), established a mechanism for automatically updating the minimum salary level every three years and allowed employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the new standard salary level.
Ultimately, the May 2016 proposal was challenged in court. On November 22, 2016, the U.S. District Court for the Eastern District of Texas enjoined the DOL from implementing and enforcing the proposal. On August 31, 2017, the court granted summary judgment against the DOL, invalidating the May 2016 proposal. Currently, the Department is enforcing the regulations that have been in place since 2004, including the $455 per week standard salary level.
While an appeal of that decision to the United States Court of Appeals for the Fifth Circuit is pending, the current DOL seeks to formally rescind the Obama-era DOL’s 2016 proposal with this Proposed Rule. In its place, the new Proposed Rule would raise the minimum salary level for exempt employees to only $679 per week, or $35,308 annually. The Proposed Rule does have many similarities to the 2016 proposal, including:
- Allowing employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test (provided such bonuses are paid annually or more frequently);
- Increasing the total annual compensation requirement needed to exempt “highly compensated employees” to $147,414 annually (currently set at $100,000 annually); and
- Not proposing any changes to the standard duties test for the white collar exemptions.
If the Proposed Rule is adopted, the DOL estimates that over 1.3 million workers who are currently classified as “salaried exempt”—and thus, not eligible for overtime—will become eligible for overtime pay. While an increase, this figure is lower than the estimated 5 million workers who would have become eligible for overtime under the 2016 proposal. As with the prior proposal, observers feel the number could rise well above the projected increase. If implemented, the Proposed Rules will undoubtedly result in greater expense or operational change for many employers as they struggle to deal with a shrinking pool of workers who are eligible for an exemption from the overtime pay.
The Proposed Rule is still subject to a lengthy comment period before implementation. The DOL encourages any interested members of the public to submit comments about the proposed rule electronically at www.regulations.gov (Rulemaking docket RIN 1235-AA20).
Though the Proposed Rule has not yet been finalized, employers are encouraged to be proactive and engage their legal counsel to begin planning for the change now. Preparations should include auditing current practices and projecting the cost of change and FLSA compliance under the anticipated new framework. This includes evaluating the possibility and effects of significantly higher operating costs.