By Alesha Brown and Michael Cohen
Cranfill Sumner & Hartzog, LLP
Since 2004, the Department of Labor (“DOL”) has required that employees otherwise qualified under the executive, administrative, or professional (“EAP” or “white collar”) exemptions be paid overtime if they earn less than $455 per week, equating to annual salaries below $23,660, regardless of their duties. In May 2016, the Obama administration proposed to increase the annual salary threshold to $47,476, or $913 per week. The Obama administration’s rule also proposed that the Highly Compensated Employee (“HCE”) exemption compensation level increase from $100,000 to $147,414, along with automatic updates to the salary levels every three years.
The Obama administration’s salary threshold rule was scheduled to take effect on December 1, 2016. However, on November 22, 2016, just over one week before the rule’s implementation, a federal judge in the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction, thereby preserving the status quo while the court reviewed the DOL’s authority to make the rule. The court held that the salary threshold increase at issue “create[d] essentially a de facto salary-only test,” and “ignore[d] Congress’s intent by raising the minimum salary level such that it supplants the duties test.” The DOL appealed the court’s ruling to the Fifth Circuit on December 1, 2016.
Following President Trump’s inauguration in January 2017, the DOL largely went silent regarding its position on the appeal and the rule, though it expressed its intention to reevaluate the salary threshold. On August 31, 2017, during the appeal of the preliminary injunction, the Eastern District of Texas granted summary judgment against the DOL, officially invalidating the Obama administration rule. The court therein held that the rule “would exclude so many employees who perform exempt duties,” rendering the rule inconsistent with “Congress’ unambiguous intent.” In essence, while the court did not invalidate the DOL’s ability to adjust the salary threshold, it held that more than doubling the threshold effectively eliminated the duties test, going beyond the DOL’s role of merely setting a floor to screen out employees that are very likely non-exempt.
On March 7, 2019, after seeking public comment, the DOL issued a Notice of Proposed Rulemaking, which reflected its newly proposed rule. The proposed rule would increase the minimum salary threshold for the “white collar” exemptions from $455 per week ($23,660 per year) to $679 per week ($35,308 per year). Any employees paid less than the newly proposed salary threshold would be deemed non-exempt and rendered eligible for overtime premiums, regardless of their duties or basis of pay. The proposed rule does not include automatic adjustments, as the Obama administration rule did, but the DOL has indicated an intent to propose an update every four years via notice and comment rulemaking. The proposed rule is based on the salary level for the 20th percentile of full-time salaried workers in the lowest census region and in the retail industry nationwide. The DOL estimates that, if implemented, its rule will render 1.1 million workers eligible for overtime premiums.
In addition to updating the “white collar” salary threshold, the proposed rule also increases the HCE exemption under the Fair Labor Standards Act (“FLSA”) from $100,000 per year to $147,414 per year. Accordingly, to be considered an exempt HCE under the proposed rule, an employee must be paid on a salary or fee basis, must customarily and regularly perform at least one of the exempt duties of an executive, professional, or administrative employee, and must earn at least $147,414 per year. The proposed rule also allows employers to use “certain nondiscretionary bonuses and incentive payments,” including commissions, to account for up to 10% of the new $679 per week salary threshold. However, the 10% compensation must be paid annually, rather than quarterly. The 10% provision is consistent with the rule proposed by the Obama administration.
The proposed rule will now undergo a period of notice and comment under the procedures of the Administrative Procedure Act, followed by additional evaluation. The DOL estimates that the final rule will take effect January 2020. The DOL’s January 2020 goal is quite ambitious, particularly when considering potential litigation and a presidential election looming. While the process is still underway and the final rule has yet to be rolled out, we anticipate that the final rule will be identical or substantially identical to the proposed rule.
If you advise employers that employ workers earning a salary of less than $35,308 per year, now might be the right time to prepare for the new rule’s implementation. If workers earning below the new threshold amount are already classified as non-exempt and entitled to overtime premiums, this rule will not affect their pay. Likewise, the rule will not affect the pay of workers who do not work overtime hours, i.e. hours in excess of 40 per week, regardless of their exempt status. If, however, your clients employ workers earning a salary below $35,308 (or $147,414 for HCEs), and such workers are currently classified as exempt, you should advise your clients to either reclassify the workers as non-exempt and pay them overtime, or raise the workers’ salaries to or above the threshold amount to maintain their exempt status. Your clients may also want to consider limiting hours and spreading work to other employees to help avoid paying overtime premiums, which was one of the principal purposes for the FLSA’s enactment. To the extent your clients reclassify certain employees due to the new rule, you should ensure that your clients are maintaining adequate records under the FLSA, as is required for non-exempt employees. As always, you should also take this opportunity to examine which employees your clients classify as exempt, and whether such employees satisfy the requisite duties for each applicable exemption.
Misclassification class and collective action and individual suits remain on the rise, and with the passage of this rule, which will likely entitle over one million more workers to overtime premiums, you should expect that trend to continue. Early and comprehensive preparation will help ensure that your clients avoid the significant costs (both economic and non-economic) that accompany these new changes.
