salary - Horton Management Law

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!

The best way to keep in touch is to sign up for our email newsletter. It’s free and will also let you know how to sign up for our complimentary webinars. You can be sure there will be one of those covering this topic before a new rule takes effect!

Several common FLSA overtime exemptions require that employees be paid on a salary basis. A salary usually refers to a fixed amount of compensation that an employee receives regularly. But, for FLSA purposes, paying employees on a salary basis is more complicated than just that.

Minimum Wage & Overtime Exemptions

The FLSA is a federal law that covers most employers in the United States. It generally requires them to pay employees a minimum wage and overtime for working over 40 hours in a week. The law allows various exemptions from these standard requirements. The most widely applicable are often referred to as “white collar exemptions”. (They primarily apply to employees who perform little manual labor.) These include the executive, administrative, professional, and outside sales exemptions.

Employers do not have to pay overtime to employees who qualify for these exemptions. (They are also technically exempt from minimum wage, though their compensation typically exceeds that level anyway.)

The executive, administrative, and professional exemptions require that the employee is paid on a salary or fee basis of at least $455 per week. There is no salary requirement for the outside sales exemption.

Many states have similar minimum wage and overtime laws and exemptions. Some of these have higher salary requirements for exemption. Employers usually must satisfy both state and federal overtime requirements.

Salary Basis Requirement

“Salary Basis” compensation means the employee receives a predetermined amount of pay each pay period on a weekly or less frequent basis. That part is relatively straightforward.

The complexity lies in the further detail that the predetermined amount cannot be reduced based on the quality or quantity of the employee’s work. Improper salary reductions can destroy an exemption. That can open up the employer to substantial liability for unpaid overtime.

Permissible Deductions

Generally, an exempt employee must receive their full salary for any week in which they work at all. Conversely, if an exempt employee does not work at all in a week, then no payment is required under the FLSA.

There are also a few limited situations where missing time during a week can warrant a lawful pay reduction without jeopardizing the salary basis requirement:

1. First and Last Weeks of Employment

An exempt employee who starts their job after the first day/hour of a workweek can receive a pro-rated salary payment for that week.

The same applies to an employee who ends employment before the last day/hour of a workweek.

2. Absence for Personal Reasons Other than Sickness or Disability

If an exempt employee voluntarily takes one or more full days off for personal reasons, then their employer could dock their pay for the day(s) without undermining their FLSA exemption. No pay reduction is permissible, however, for partial day personal leave.

3. Absence for Sickness or Disability

Employers may also reduce an exempt employee’s pay for full-day absences due to sickness or disability. But, the pay reduction must be consistent with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness.

If the employer does not have a sick leave policy, then making pay deductions for sickness or disability, even in full-day increments, will interfere with the salary basis component of applicable FLSA exemptions.

However, when an exempt employee is eligible for paid sick leave but exhausts available leave time, then their employer may reduce their salary for full-day absences due to additional sick days.

Employers may likewise pay only a pro-rated salary in weeks where an employee receives workers’ compensation or disability insurance benefits for days they are not working.

4. Unpaid FMLA Leave

When employees are eligible to take time off under the Family and Medical Leave Act (FMLA), the law only guarantees unpaid leave. Accordingly, employers may reduce salaried exempt employees’ pay for time off under the FMLA.

FMLA leave can sometimes be taken for only part of a workday. In those cases, employers could make pay deductions in less than full-day increments.

5. Offsetting Jury or Witness Fees or Military Pay

Employees who are off of work to serve on a jury, testify as a witness, or serve in the military might receive alternative compensation to do so. In these cases, the employer does not have to maintain the full salary over the periods of these absences, even if only for part of a day.

6. Penalties for Infractions of Safety Rules of Major Significance

Employers may reduce salaried employees’ pay for certain safety violations. According to FLSA regulations:

“Safety rules of major significance include those relating to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries and coal mines.”

7. Disciplinary Suspensions for Workplace Conduct Rule Infractions

If an employer suspends an exempt employee for violating a written policy that applies to all employees, then they may deduct pay for full days that the employee does not work. This allows the employer to implement an unpaid suspension.

Consequences of Improper Salary Deductions

An employer that makes impermissible deductions from an exempt employee’s salary may lose the exemption not only for that employee, but perhaps for all employees in the same job classification.

However, isolated or inadvertent deductions will not destroy the exemptions as long as the employer reimburses the employees for all improper deductions.

There is a “safe harbor” protection available to employers that:

(1) have a clearly communicated policy prohibiting improper deductions and including a complaint mechanism;

(2) reimburse employees for any improper deductions; and

(3) make a good faith commitment to comply in the future,

An employer that satisfies the safe harbor parameters will not lose exemptions improper deductions unless it willfully continues to make improper deductions after receiving employee complaints.

Review Your Pay Practices

Employers who are uncertain about their full compliance with these rules should promptly review their exempt employee pay practices. The penalties for losing exemptions can be costly if employees subsequently seek overtime compensation.

Keep in mind that state wage and hour laws might have different exemptions or construe them differently. Employers covered by both state and federal overtime laws must comply with both. Many states apply similar salary basis concepts, but some situations might necessitate alternative or additional analysis.

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2019 Overtime Rule Proposes $35,000 Salary Level