DOL Issues Proposed Salary Level Increases (April 1, 2019)
On Friday, March 22, 2019, the US Department of Labor (DOL) published its long-awaited Proposed Rule and Request for Comments regarding changes to the salary level required to satisfy the “white-collar exemptions” for purposes of overtime under the Fair Labor Standards Act (FLSA). The DOL proposes to increase the salary-level threshold from the current level of $23,660/year ($455/week) to $35,508/year ($679/week), about a 49% increase. Written comments may be submitted on or before May 21, 2019 and readers are cautioned to remember these are only proposed changes. The DOL anticipates the effective date of any Final Rule will be sometime in 2020, but it is not too early for employers to begin assessing how these proposed changes, if they become final, would impact their particular workplace.
Under the FLSA and the DOL regulations, each of three tests must be met for one of the FLSA’s exemptions to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in quality/quantity of work performed (“salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and (3) the job duties must meet the executive, administrative, or professional duties as defined by the regulations (“duties test”). The Proposed Rule only addresses the salary level test.
The Proposed Rule would also increase the total annual compensation requirement for “highly compensated employees” from the currently-enforced level of $100,000 to $147,414 per year and provide for periodic review (not auto-updates) of the salary threshold (which would continue to require notice-and-comment rulemaking). The proposal also calls to allow 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.
Most experts agree the proposed changes are likely to later become Final Rules. If that holds true, DOL estimates this increase will result in reclassification of more than 1,000,000 US workers from exempt to non-exempt and, thus, entitled to overtime for all hours worked over 40 in a workweek. If finalized, the DOL estimates the average annualized direct employer cost will total approximately $120.5 million per year over the first ten years, but this cost would still be significantly less than under the previously-proposed (but later invalidated) 2016 Final Rule.
If the Proposed Rule become Final Rules, this would mean that an exempt employee earning $455/week but less than the proposed $679/week would, absent some action by the employer, become eligible for overtime under the FLSA. The DOL notes employers may address this situation by raising the salary level, reorganizing workloads, adjusting work schedules, or spreading work hours among several employees in order to avoid payment of overtime; however, these types of adjustments may not necessarily be well-received. Such changes must not be implemented without deliberate consideration of the potential to create other unintended employment-related issues and employers should tread carefully in this complex area.