DOL Issues New Rule Updating Salary Level Test for Exemption from Overtime

On March 7, 2019, the United States Department of Labor (DOL) released its long-anticipated replacement for the Obama administration’s controversial overtime rule, increasing the salary threshold for employees to qualify for exemption from overtime under the white collar exemptions to $35,308 per year.

Under the “white collar” exemptions to the Fair Labor Standards Act, certain executive, administrative, professional, outside sales, and computer employees are exempt from the minimum wage and overtime requirements of the law if they satisfy three tests: the salary basis test; the salary level test; and the duties test. In 2016, then-Labor Secretary Thomas Perez issued a rule increasing the salary level test from $455 per week ($23,660 per year) to $913 per week ($47,476 per year).

The 2016 rule, which was estimated to require employers to pay overtime to over 4 million previously-exempt workers, was challenged in court. In November 2016, only a week prior to its effective date, a federal district court in Texas enjoined DOL from implementing the rule, and in August 2017, that same court granted a motion for summary judgment against DOL and invalidated the rule. That history is important, as the 200+ page proposed rule goes to great lengths to explain how the Trump DOL has attempted to craft the new rule to come within the guidelines laid out by the court in that case.

The rule proposed on March 7 formally rescinds the 2016 rule, and includes the following:

1. Salary Level: $679 per week/$35,308 annually. DOL notes there was near universal recognition of the need to increase this element of the test for exempt status, which has been $455/week ($23,660/year) since 2004. In arriving at the new figure, DOL applied the methodology from 2004 to current economic data. DOL estimates that 1.1 million currently exempt employees will become eligible for overtime under the proposed rule, unless their employers act to keep them exempt.
   
   
2. Nondiscretionary Bonuses, Incentive Payments, and Commissions. The 2016 rule allowed employers, for the first time, to count nondiscretionary bonuses, incentive pay, and commissions to satisfy up to 10% of the salary level test. Finding that these payments are an important part of many employers’ compensation systems, the new rule preserves that feature of the failed Perez rule. The proposed rule permits nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10% of the salary level test, provided such payments are made annually or more frequently.
   
   
3. Catch-up Payment. The proposed rule permits employers to make a single “catch-up” payment after year’s end to bring an employee’s compensation up to the required level. Under this aspect of the proposal, an employer must pay the exempt employee at least 90% of the salary level (at least $611.10/week); at the end of the year, if the salary paid plus nondiscretionary bonuses, incentive, and commissions paid does not equal $35,308, the employer will have one pay period to make up the shortfall (up to 10 percent of the salary level, or $3,530.80). Any catch-up payment would count toward the prior year’s salary amount, and not toward the salary in the year in which it is paid. The proposed rule’s catch-up payment differs from the 2016 rule, which mandated catch-up payments on a quarterly basis.
   
   
4. Highly Compensated Employee Threshold. Since 2004, the test for the white collar exemptions has included an alternative test for Highly Compensated Employees (HCE). Under the HCE test, if the employee earns a high annual salary — set at $100,000 in 2004 — and his or her primary duties include office or non-manual work, the employee is automatically deemed exempt, without resort to the longer duties test. The proposed rule seeks to increase the HCE threshold to $147,414 annually, of which at least $679 must be paid weekly. The “catch-up” payment permitted for non-HCE personnel also applies to the HCE test.
   
   
5. Quadrennial Updates. The new rule proposes to update the standard salary level and the HCE test once every four years, through the DOL’s established rulemaking process of notice of a proposed rule, a period of public comment, then issuance of a final rule.
   
   
6. Miscellaneous Changes. The proposed rule sets lower salary tests for Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, and American Samoa. The Motion Picture Producing Industry gets a higher salary level test of $1,036 per week.
   
   
7. What Doesn’t Change. The proposed rule makes no changes to the two other components of the triad for the white collar exemption — the salary basis test and the duties test.
   
   
8. Effective Date. The proposed rule must go through a public comment period, followed by agency review of those comments and possible revisions leading up to the final rule. Accordingly, the proposed rule cannot identify a precise effective date, but the text at several points projects an effective date of January 2020.

Meaning for Your Business

As was true after the issuance of the 2016 rule, the proposed rule will require employers to revisit how they have categorized employees as exempt or non-exempt. Of particular concern will be employees denominated as exempt who are making less than the new salary threshold of $35,308. As to those personnel, employers will face the choice of increasing their salary above the new level, or foregoing the raise and treating the employee as non-exempt (i.e., track hours worked and pay for overtime as necessary). With the reduction of the salary level versus the 2016 rule, however, that choice should be less prevalent — and less painful — for employers.

The Labor & Employment lawyers at Calfee welcome the opportunity to assist you with any wage and hour compliance issues your business may be facing, including preparing for implementation of this new overtime rule.