On March 7, 2019, the United States Department of Labor (“Department”) announced its Notice of Proposed rulemaking to update the regulations that interpret the Fair Labor Standards Act (“FLSA”). < https://www.dol.gov/whd/overtime2019/index.htm > This law requires employers to pay overtime pay to most workers who work more than 40 hours in the same workweek. It, however, exempts certain categories of workers, exempt employees, from the FLSA’s overtime requirements. The proposed rule affects those exempt employees eligible for the White Collar exemption for executive, administrative, professional, or computer employees. This exemption also exempts outside salespersons from overtime, but the proposed rule makes no changes to the outside sales exemption. To be eligible for the White Collar exemption, employers must compensate the workers, other than outside salespersons, on a salary basis and the employees must perform exempt duties. < https://www.dol.gov/whd/overtime/fs17a_overview.htm >
The Proposed Rule Raises the Exemption’s Minimum Compensation Levels and Allows Bonuses or Commissions to Offset Up to Ten Percent of Minimum Annual Salary Levels.
The Department’s proposed rule primarily raises the minimum salary that an exempt executive, administrative, professional, or computer employees must receive to be eligible for the White Collar overtime exemption. Currently, the minimum salary equals $455 weekly, or $23,660 annually. The proposed rule increases that minimum salary to $679 weekly, or $35,308 annually. It also boosts the minimum total annual compensation to be eligible for the highly compensated employee’s overtime exemption from the current level of $100,000 to $147,414. In addition, the proposed rule allows employers to count non-discretionary bonuses, commissions, or other incentive payments to satisfy a maximum of ten percent of the White Collar exemption’s minimum salary level. In other words, an employer could pay an annual salary of $31,777 plus any one or more of non-discretionary bonuses, commissions, or incentive payments that equal, at least $3,530.80 in total annually and still meet the minimum annual salary requirement. Finally, the proposed rule includes a non-binding commitment for the Department to conduct reviews every four years to determine whether to increase the minimum salary level for White Collar overtime exemption eligibility.
The Department of Labor Estimates that the Proposed Rule Will Have a Significantly Reduced Impact on Employers in Comparison to the 2016 Rule.
In 2016, the Department issued a rule that would have elevated the minimum salary for the White Collar overtime exemption to $913 weekly, or $47,472 annually. That rule never took effect, because employer groups sued the Department and obtained a nationwide injunction a few days before its effective date. The trial court found that the 2016 rule doubled the minimum salary for the exemption and, in so doing, had effectively replaced the FLSA’s requirement that an employee’s job duties must determine whether the White Collar exemption applies. < https://theblogforbusinesslaw.com/texas-trial-court-suspends-the-revised-white-collar-overtime-exemption-rules/ >
The Department appealed the trial court’s ruling and asked the appellate court to stay the appeal, pending its completion of new rulemaking. The court entered such a stay and the current proposed rule provides the Department’s effort to update the White Collar exemptions in a way that addresses the trial court’s criticisms of the Department’s 2016 rule.
The Department’s proposed rule sets the minimum salary by using the same methodology as it had used in 2004 to set the current minimum salary level. Specifically, the Department based the minimum salary on the salary levels for the 20th percentile of earnings for full-time salaried workers in the lowest census region—the South—and in the retail industry nationwide.
According to the Department, the proposed rule’s new minimum salary will eliminate more than one million employees from the ranks of those eligible for the White Collar exemption, assuming their salaries stay at current levels. In 2016, the Department projected that the 2016 rule would cause 4.2 million workers to lose their exempt status if their salaries remained constant. In addition, the Department estimates that the proposed rule will increase direct costs to employers by $120 million annually when it takes effect. The Department further notes that the 2016 rule would have raised the direct costs to employers by another $224 million yearly, or by a total of $344 million annually.
How to Prepare for the Proposed Rule’s Implementation.
The proposed rule will likely become a final rule and take effect in either late 2019 or early 2020. In the meantime, employers should take the following steps to get ready:
1. Review payroll records of salaried executive, administrative, professional, and computer employees who the employer compensates by annual salaries of less than $35,308 only.
2. Review payroll records of salaried executive, administrative, professional, and computer employees who earn annual salaries of , at least, $31,777 and also receive non-discretionary bonuses, commissions, or other incentive payment that annually total, at least, $3,530.80.
3. Review the job duties of such employees and confirm that they spend more than one-half of their working time doing exempt duties.
4. Decide whether:
- to pay these employees overtime pay for all hours worked beyond 40 in the same workweek,
- to increase their annual salaries to, at least, $35,308 for employees paid by their salary only,
- to raise their annual salaries to, at least, $31,777 if they also earn non-discretionary bonuses, commissions, or other incentive payments that annually total, at least, $3,530.80,
- to reassign some of their duties to other workers to eliminate the need for them to work more than 40 hours in the same workweek, or
- to limit these employees to a workweek of no more than 40 hours.
5. For highly compensated employees performing office or non-manual work, currently earning an annual salary of at least $23,660 and other non-discretionary compensation, such as commissions and bonuses, that produce total annual compensation of, at least $100,000, and customarily doing, at least, one of the bona fide exempt duties of an executive, administrative, or professional employee, employers must:
- Analyze the highly compensated employee’s job duties to determine whether her or his duties satisfy the eligibility requirements for the executive, administrative, or professional overtime exemption.
- If so, the employer should reclassify the employee accordingly and raise her or his annual salary to at least $31, 777.
- Otherwise, the employer has three options:
- raise the employee’s annual salary to $35,308 if her or his total annual compensation will total at least $147, 414 to maintain her or his exempt status as a highly compensated employee;
- change her or his duties to allow the employee to meet all the requirements for one of the White Collar exemptions, or
- reclassify the employee to non-exempt status and pay overtime pay to her or him.
Finally, employers also must pay attention to state overtime laws. The Missouri law specifically includes a provision that requires its interpretation consistently with the FLSA. On the other hand, Illinois law requires the interpretation of the state law’s White Collar overtime exemptions consistently with the FLSA’s similar exemptions generally, but it lacks any provision substantially the same as the overtime exemption for highly compensated employees. Consequently, Illinois employers must follow the more restrictive state law, and they have no overtime exemption for highly compensated employees.