While it’s been kicked around since the days of the Obama administration, the U.S. Department of Labor has finally gotten to the finish line on a proposed overtime rule–with the result being an estimated 1.3 million American employees who potentially will be getting their first taste of overtime pay.
Falling under the Fair Labor Standards Act (FLSA), on Tuesday, the Labor Department announced its final rule, which takes effect Jan. 1, 2020, and updates the earnings thresholds necessary to exempt executive, administrative or professional employees from the FLSA’s minimum wage and overtime pay requirements. The new thresholds account for growth in employee earnings since the currently enforced thresholds were set in 2004, according to the DOL. In its final rule, the agency is:
- raising the “standard salary level” from the currently enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker);
- raising the total annual-compensation level for “highly compensated employees (HCE)” from the currently enforced level of $100,000 to $107,432 per year;
- allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices; and
- revising the special salary levels for workers in U.S. territories and in the motion-picture industry.
Tammy McCutchen, a Washington-based principal at the Littler law firm, calls the final rule “a fair compromise,” one that finally brings to a close a four-year effort to increase the minimum salary level for the “white-collar” exemption. She also explains that the rule replaces 2016 regulations, which would have more than doubled the minimum salary level to $913 per week ($47,476 annualized). That rule, however, was blocked by a Texas district court in November 2016.
While some critics say that the new minimum salary level of $684 per is too low, McCutchen disagrees.
“The new salary level will work everywhere in the country without harming economies in the South and Midwest,” she says, noting that it won’t add new, unjustified costs to small businesses, nonprofits, local governments, colleges and universities, as well as the restaurant and retail industries–already struggling to meet increased minimum-wage and paid-sick-leave requirements.
“Yes, it may seem low for employees in California, New York and other states with high costs of living,” she says, “but, like the minimum wage, those states can and have adopted a higher minimum salary for exemption.”
Some worker-advocacy groups are considering a legal challenge to the new minimum salary level, which they deem too low, but McCutchen doesn’t believe such an approach would succeed.
“Procedurally, the DOL has taken all required steps to update the rule,” she says, noting the agency reviewed all the comments from the past four years and responded to them, adopting a salary level based on the 2004 methodology, which was never challenged court.
Also, she explains, litigation challenging this new final rule could open the door for the business community to challenge the DOL’s authority to require any minimum salary level.
“Such an argument may have more chance of success today than in the past, McCutchen says, noting that federal courts seem to have shifted more towards “textualism”–strictly interpreting the statutory language–noting, “a salary requirement is not in my copy of the FLSA.”
Peter Frattareli, chair of the labor and employment department at law firm Archer, says smaller employers are most likely to be affected by the change, along with midsize or larger employers who have entry-level or junior employees placed into traditionally exempt job positions, such as managers, professionals or administrators.
“If those employees are not earning the $684 per week, employers must pay them overtime,” he says. “The current threshold was often not a concern, as it was close to [or below] the federal poverty level for anyone with dependents.”
Frattareli adds that, for states in which the minimum wage is higher than the federal level, the current threshold is close to minimum wage.
“But this higher threshold will certainly capture otherwise exempt employees,” he says.
The bottom line, he says, is that every employer needs to examine the salaries being paid to exempt employees to see if they still can avoid paying them overtime. If employers are paying any exempt employees less than the threshold, the employer must either increase the employees’ pay to above that threshold, or reclassify the employees as non-exempt and allow them to earn overtime. This means the employer needs to do a cost-benefit analysis to determine what would be more financially economical–such as raising the salary to exceed the $684/$35,569 minimum or deciding instead to pay them overtime.
Beyond the finances, Frattareli explains there are “practical” concerns. For example, if employees are being reclassified as non-exempt, employers must start tracking their work hours through time clocks, time cards, etc.
“Employers should not rely on work schedules or expected hours to determine how much overtime is owed,” he says.
Next, and similarly, those previously exempt employees must have any unpaid meal breaks examined to ensure there is no work done during those meals, or that it is paid.
Finally, employers also need to deal with a potential morale issue if employees previously classified as exempt feel a transition to non-exempt is a demotion. In those sensitive cases, and where the economics are close, he says, employers may wish to simply raise the employees’ salaries to the $684/$35,569 threshold and avoid the problem.
Carolyn Richmond, chair of the Hospitality Practice Group and former co-chair of the labor and employment department at Fox Rothschild, says there were “no significant surprises” in the final rule. She agrees with McCutchen that the final rule represents a true “compromise” from the earlier proposals, adding that, while the new threshold is still significantly lower than that of many states–New York and California are right up against the $50,000 mark–it is a big enough increase that many employers will face rather large payroll increases.
One unexpected element in the final rule, Richmond adds, is that the DOL seems to have dropped its plan to automatically update the minimum salary and “highly compensated” level on an annual basis. While the agency appears to say it will update the rates more regularly than in the recent past, it will still need to go through the steps of publishing notice of any proposed increases and giving the public an opportunity to comment.
“With the new rules going into effect on Jan. 1, it means that many employers are scrambling to change and finalize labor budgets for next year,” she says. “More significantly, for those employers not willing or able to make such a substantial leap, they have a more complicated employee-relations problem: whether or not to reclassify formerly exempt managers as not exempt and, thus, [making them] eligible for overtime.”