As Yogi Berra, the great baseball sage, famously quipped: “It’s like déjà vu all over again.”
Business leaders may recall that in May of 2016, the United States Department of Labor (DOL) issued a “final” rule doubling the minimum salary threshold under the Fair Labor Standards Act (FLSA) to be exempt from overtime eligibility, from the current level of $23,660 to $47,476 per year.
Business groups lined up against this exorbitant increase and the usual suspects in the organized labor movement applauded the estimated 4.2 million employees who would now be eligible for overtime pay who had heretofore been considered exempt.
With the effective date of the change approaching on December 1, 2016, employers scrambled to analyze their exempt positions and potential liabilities as a result of the change. Companies had to make the difficult decision: to either increase the salaries of exempt positions (to maintain the exemption) or leave the salaries unchanged.
The latter choice would require employers to constantly monitor hours worked to avoid significant overtime liabilities.
After U.S. employers spent untold millions preparing for compliance with the new rule, an injunction was issued staying its enforcement. The rule was ultimately declared invalid by the United States District Court for the Eastern District of Texas. The DOL appealed, but after the 2016 election, with its change of administrations, the Fifth Circuit Court of Appeals dismissed the DOL’s appeal (at the DOL’s request).
The DOL under the Trump administration continued to review the issue, floating various more modest increases in the salary threshold to business and labor groups. On March 7, 2019, the DOL finally announced it was formally rescinding the 2016 rule and proposing a new Rule that would increase the minimum salary needed to qualify for the so-called “white collar” exemptions to $35,308 annually. It is estimated by the DOL that 1.1 million additional workers would qualify for overtime pay under this more modest increase in the salary threshold.
For background, the FLSA’s white collar exemption excludes executive, administrative, and professional employees from the federal minimum wage and overtime requirements. However, to qualify for one of these exemptions, an employee generally must pass both a “salary” test and a “duties” test. The salary component is actually in two parts: first, to be salaried, 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. Second, the predetermined salary must meet a certain threshold (as noted, currently $455 per week or $23,660 per year).
The duties test (which is not impacted by the current rule change proposal) focuses on the primary duties of the position at issue. To qualify under the “executive” exemption, the employee’s primary duty must be managing the company or managing a recognized department or subdivision of the company. The employee must also direct the work of at least two full-time employees and have authority with respect to hiring and firing. To qualify under the “administrative” exemption, the employee must exercise discretion and independent judgement and the employee’s primary duty must be the performance of office or non-manual work directly related to the management or business operations of the employer or the employer’s customers.
Under the “professional” exemption, the employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning. The FLSA regulations go into significant detail examining all aspects of the various duties tests.
The Notice of Rulemaking sets forth two interesting changes to the current salary basis regulations. First, the Rule includes an amendment to allow employers to use nondiscretionary bonuses and incentive payments (including commission payments) to satisfy up to 10 percent of the new salary level.
Secondly, the DOL also proposes to increase the minimum annual compensation requirement for exempt “highly compensated” employees. Highly compensated employees are exempt if they perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the standard tests set forth in the FLSA regulations. Currently, to be exempt as a highly compensated employee, an employee’s total annual compensation must be at least $100,000. The new minimum proposed by the DOL will be $147,414. This “total annual compensation” must include at least $679 per week paid on a salary basis. Total annual compensation may also include commissions, bonuses, and other nondiscretionary compensation.
Not surprisingly, missing from the new Rule is the controversial provision of the 2014 rule containing automatic increases in the salary threshold every three years, commencing in 2020. Instead, the DOL announced its intent to issue further proposals to update the salary thresholds for the white collar and highly compensated employee exemptions once every four years.
The DOL has requested public comment on the proposed Rule. The comment period will begin once the Notice of Proposed Rulemaking is officially published in the Federal Register and will remain open for 60 days thereafter. If it is enacted, the proposed Rule will likely be effective in early 2020. Companies who wish to be proactive should consider the following steps in anticipation of the new Rule:
—Review the current salaries of all your exempt employees.
—Analyze which employee salaries you can and/or should raise in order to retain the exempt status.
—Determine the impact of these increases on your company’s labor budget.
—Review the hours worked by your exempt employees and determine the costs involved if these employees were converted to hourly and paid overtime.
—Examine whether you will decrease the hourly rate when you convert employees from salary to hourly (so that total annual earnings remain constant).
Companies with questions concerning these changes should consult with their experienced employment legal counsel for assistance.
Steven K. Girard is an attorney in the Grand Rapids office of Clark Hill PLC, specializing in the firm’s Labor and Employment Practice Group. He represents a variety of clients with most of his work involving the negotiation of collective bargaining agreements.