On March 7, 2019, the U.S. Department of Labor released new proposed rules regarding FLSA overtime exemptions. The 2019 overtime rule differs substantially from the one pursued by the Obama administration in 2016. The $35,000 threshold falls almost exactly between the current federal requirement ($23,660) and the 2016 proposal ($47,476). The DOL has not proposed changes to the duties test for the “white collar’ exemptions, but did modify other aspects of the existing regulations.
FLSA “White Collar” Exemptions
The Fair Labor Standards Act (FLSA) is a federal law requiring employers to pay minimum wage and overtime. Most employees must receive overtime for working over 40 hours in a week. Some exceptions apply. The most prevalent ones fall into the category of “white collar” exemptions.
The administrative, executive, professional, and outside sales exemptions all fall under the “white collar” rules. Of these, the first three have salary requirements. The outside sales exemption does not.
To qualify for administrative, executive, and professional exemptions, most employees must satisfy both duties and salary requirements. (There is no salary requirement for doctors, lawyers, and teachers under the FLSA professional exemption.)
Many states have separate overtime exemption requirements. Employers generally must satisfy both state and federal exemptions. In some states, the salary requirement already exceeds the new proposal. The overall impact of the FLSA 2019 overtime rule may be less in such states.
Salary Levels
In 2004, the Department of Labor set the salary threshold for the white collar exemptions at $455 per week. This equates to $23,660 annually.
Near the end of President Obama’s second term, the Department of Labor proposed and finalized an increase to the salary requirement. The 2016 rate was $913 per week, or $47,476 per year. Shortly before the increase took effect, a federal court blocked it. That court case is technically still pending on appeal.
Now the Trump DOL is pursuing this new rule to replace the blocked rule and the one that preceded it. The March 2019 proposal sets the weekly requirement at $679, or $35,308 annually. This represents almost exactly the midpoint between the 2004 (current) and 2016 (blocked) salary levels.
The March release by the DOL does not establish a $679 per week salary requirement. There will be a 60-day comment period first. Then the DOL would be able to issue a final rule. The final rule could adopt this proposal or modify it in either direction.
[Along with a salary level test comes a salary basis requirement. For more on that component of the white collar exemptions, click here.]
No Automatic Adjustment in the 2019 Overtime Rule
The 2016 rule not only doubled the salary threshold, but also established a mechanism for automatic adjustments every three years. That approach would have almost certainly increased the salary requirement at large intervals.
Instead of automatic increases, the 2019 overtime rule proposal suggests that the DOL review the salary threshold every four years. The agency could then change the requirement through new notice and comment rulemaking.
Highly Compensated Employees
Surprisingly, there is one aspect of the 2019 overtime rule proposal that is more burdensome on employers than the 2016 regulations.
The FLSA also has a “highly compensated employee” exemption. Right now, it requires that the employee receive at least $100,000 in total compensation in a year. The current proposal increases that almost by half to $147,414. By comparison, the 2016 rule would have only required compensation of at least $134,004 annually.
However, the precise amount of this change might not be a significant concern for most employers. The highly compensated employee exemption is primarily a shortcut to the traditional white collar exemptions. It applies where the employee meets the compensation threshold and also performs at least one of the duties of an exempt executive, administrative, or professional employee. Most employees who qualify for this exemption, whether at the $100,000, $134,004, or $147,414 level, would also be eligible for the full executive, administrative, or professional exemption anyway.
What Does This Mean for Employers?
For now, this is only a proposal. We are at least two months away from the DOL moving to finalize these changes. And most likely the DOL will set the new salary threshold and give employers some lead time to prepare for the increase. Ideally, the DOL might have the new rules apply beginning January 1, 2020, when many employers make annual wage adjustments anyway.
Still, it’s not too early to start planning for the increase. $35,308 might not be the exact new threshold. But it will probably be in that ballpark. If your company has exempt employees making less than that, you might have to pay them more to maintain the exemption. The alternative would be to eliminate their exemption and pay overtime as required. There are many strategies and approaches to implementing these changes. We’ll try to address some of them once the final rule comes out. So, stay tuned!
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