The U.S. Department of Labor has issued a formal notice of proposed rulemaking increasing the salary threshold for exempt employees under the FLSA starting January 1, 2020. The proposed new salary threshold is $679 per week, equivalent to $35,308 annually, paid on a salary or fee basis (the current standard salary threshold of $455 per week was set in 2004). There will be a 60-day comment period after which the Department will analyze the comments, decide whether to make any revisions, and, if there are none, publish the proposed rule as a final rule. Based on the history leading to the development of the proposed amendments, it is highly likely that the final rule will be the same as the proposed rule and will take effect January 1, 2020.
The new threshold of $679 per week is equivalent to a salary of $35,308 on an annualized basis. The methodology the Department used to set the new salary threshold follows the methodology it used in 2004 when it adjusted the salary threshold upward at approximately the 20th percentile of earnings for full-time salaried workers in the lowest-wage Census region and in the retail sector. This methodology was deemed by the Department to be the most appropriate to achieving the salary level’s purpose, namely, to set a floor “to screen out the obviously nonexempt employees.” Stated another way, the proposed new salary level of $679 per week will screen out positions highly unlikely to have exempt duties as the primary duty. While a small percentage of positions paying less than $679 per week might meet the duties test, the administrative convenience for the Department, employers, and employees of having a bright line standard salary test outweighs the unfortunate exclusion of a small percentage of otherwise exempt employees due solely to the failure of the position being paid at the $679 salary level.
Other Features of the Proposed Rule
The Department proposes to permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level for the executive, administrative, and professional exemptions, provided that such bonuses or payments are paid annually (or more frequently).
The Department proposes to permit employers to make a final “catch-up” payment within one pay period after the end of each 52-week period to bring an employee’s compensation to the required level so long as the employer has paid at least 90 percent of the standard salary level in prior weeks.
The Department propose to raise the standard salary threshold for the highly compensated employee (HCE) test to $147,414, of which $679 must be paid weekly on a salary or fee basis (the current HCE salary test is $100,000).
Going forward, the Department intends to propose “updates” to the standard salary level and HCE total compensation threshold, using the formal notice-and-comment rulemaking process, every four years.
Employers Must Still Comply With State Laws That Define Exemptions More Narrowly
Just because an employer pays a salary that satisfies the new federal threshold does not mean that the employee is exempt under the minimum wage law of a state where the employee works. Some states have a higher salary threshold than the federal law (or have no HCE exemption or no credit for bonuses/commissions against the salary level or have more narrow duties requirements). Employers must examine state wage laws and regulations to be sure they are in compliance with both state and federal law. For example, the 2019 salary threshold in California is $880 (employers with 25 or fewer employees) and $960 (for employers with 26 or more employees) and will increase in 2020, under California’s methodology, when the state minimum wage goes up. See our advisory, Changes to Minimum Wage Laws in 2019 Will Affect Nonexempt and White Collar Employees as Well as Commissioned Inside Salespeople. The threshold in New York for executive and administrative exempts currently ranges from $832 to $1,125 (depending on size and location). See our advisory, Employers Beware Critical Changes to New York Minimum Wage and Exempt Salary Threshold Take Effect December 31, 2018. Pennsylvania is considering whether to adopt a salary threshold in the range of $923 per week. And, the state of Washington is on the verge of adopting a threshold that could be as much as $1,346 per week.
Consequently, before classifying an employee as exempt, an employer needs to check the salary threshold in the state where the exempt employee works and not simply rely on the federal salary threshold as sufficient compliance.
Employers Should Start Planning Now Regarding Exempt Positions Currently Paying Less Than $679 per Week
The Department of Labor estimates there will be 1.3 million currently exempt positions affected by the new threshold level. Employers who currently have exempt employees making less than $679 per week must decide for 2020 whether increasing the salary amount for a position to qualify for exempt status is economically justifiable (given revenue and market conditions). Small business, nonprofits, retailers, hospitality employers, state and local government, and higher education (among others) especially will be challenged.
Even for employers who increase salaries to meet the new threshold there are issues to consider such as expansion of duties, internal salary scale compression, or pay equity concerns.
For employers unwilling or unable to increase salaries to meet the $679 threshold, there are many potential disruptions to address and mitigate.
1. Employee relations/morale issues. Employees who are exempt currently will often feel they have been demoted if converted to nonexempt.
2. Payroll administration and recordkeeping burden. Employers will have to enforce timekeeping requirements with respect to employees who formerly did not have to record their time.
3. Compliance with employment standards applicable to non-exempt employees. Employers will be required to provide newly nonexempt employees with rest and meal periods or other requirements under federal, state or local law for nonexempt employees.
4. Controlling overtime. Employers will be challenged in managing overtime if the formerly exempt employee previously worked more than 40 hours a week.
5. Determining the appropriate hourly rate. Employers will have to set an appropriate hourly rate, taking into account the amount of overtime anticipated, so that they are not over-budget on labor costs.
6. Compliance with state/local leave laws. Nonexempt employees are often eligible for paid sick leave under state or local law that they would not have been eligible for as exempt employees.
7. Impact on CBAs. Employers with collective bargaining agreements will have to assess the impact on whether or not an employee is in the bargaining unit due to non-exempt status and, if so, how this impacts pay and benefits.
8. Staffing and coverage issues. To limit individual overtime, employers may have to reconfigure job duties, consider part-time employees, or revamp shift coverage and scheduling practices.
9. Eligibility for/discontinuance of perks. Employees who are converted to nonexempt status may lose certain perks or other benefits.
10. Control of after-hours/off -premises use of e-devices. Employers will need to educate newly nonexempt employees regarding restrictions on use of electronic devices after hours or off premises because such use could inadvertently create hours worked.
Will the Propose Rule Be Challenged?
The 2016 proposed rule was successfully challenged and blocked in federal court. The Department of Labor has gone through great pains to tailor it new proposed rule to avoid the factors identified by the court as impermissible under the FLSA. Thus, while there may be challenges, the current proposal makes it very difficult for any court challenge to be successful. Employers should assume that the proposed rule is likely to become a final rule effective January 1, 2020.