New Overtime Rule Unveiled; $35,308 is the New Salary Threshold
On March 7, 2019, the U.S. Department of Labor, Wage and Hour Division announced a long-expected change to the salary threshold for exemptions to mandatory overtime under the Fair Labor Standards Act (“FLSA”). The new proposal would increase the salary threshold, under which all workers must be paid overtime for working over 40 hours per week, to over $35,000 per year. The proposal is detailed in a new Notice of Proposed Rulemaking (“NPRM”) (fair warning: it is 219 pages long); however, the DOL has also issued a press release, fact sheet, and a list of frequently asked questions. All of this is in addition to the DOL’s Overtime Pay web page.
The Prior (Obama-Era) Proposed Rule
The current salary threshold—which was last updated in 2004—is $455 per week ($23,660 per year). That number was set to double, to almost $47,500 per year, in December 2016—but it never actually went into effect. As previously chronicled by HR Legalist, there were several twists and turns regarding the now-defunct Obama-era rule, including the rule’s announcement in May 2016, and the court decisions blocking it in November 2016 and September 2017.
The New (Trump-Era) Proposed Rule
Now that this new proposal has been made public, here is what employers need to know:
- The minimum salary that employers must pay employees if they seek to designate them as “exempt” from overtime pay under the “white collar” exemptions, will increase to $679 per week (or $35,308 per year);
- The new proposal would also increase the required threshold for the “highly compensated employee” (HCE) rule from the current level ($100,000) to $147,414 per year;
- Employers would be permitted to use nondiscretionary bonuses and other incentives (including commission payments) to count towards up to 10% of the salary threshold, as long as those payments are made on at least an annual basis;
- The duties test portion of the “white collar” exemption (in short, the requirement that the employee’s primary duty be executive, administrative or professional in nature) would not change. Under the new rule, employers will still need to satisfy three requirements before designating an employee as exempt: (1) the salary test (i.e. workers must be paid a fixed salary); (2) the salary level test (the number that is now changing); and (3) the duties test. Employees making over $35,308 per year will remain entitled to overtime unless the employer can show that they pass one of the duties tests; and
- Unlike the Obama-era rule, the new threshold would not be automatically adjusted every year to keep pace with inflation. In the proposal, the DOL expressed its “intention to propose increasing the earnings thresholds every four years” and sought public comment on this subject. However, it does not appear that this review process would be mandatory.
The current NPRM is only a proposal, and any changes will not take effect until after a final rule is published. Once formally published in the Federal Register, members of the public will have 60 days to submit comments (this can be done online at www.regulations.gov).
The DOL estimates that under the new rule, over 1 million employees will be eligible for overtime for the first time. This is more modest than the Obama-era rule, which was expected to impact over 4 million employees. Employer and employee groups alike have expressed dissatisfaction with the new rule, and it could be challenged in court. The prior Texas lawsuit leading to the prior rule being blocked in 2016 could be the blueprint for a legal challenge. Perhaps anticipating a challenge, the DOL opted to follow the same methodology that was used when the salary level was last set in 2004. This could make the new rule more difficult to overturn.
Employers with overtime-exempt employees making less than $35,308 per year are now faced with a choice: (1) reclassify these employees as overtime-eligible (and begin tracking their hours, if they are not already doing so); or (2) raise their salary above the new threshold. The second option may make sense for employees who are making close to $35,000 already. However, the second option should only be used if the employee’s job satisfies one or more of the duties tests. Just because an employee is paid a set salary, performs non-manual or office work, or has been given a “manager” or “supervisor” title, does not necessarily mean that they will be considered exempt.
Overtime misclassification remains a costly legal risk for employers. FLSA and state law overtime claims can be difficult to defend, especially if employers fail to track hours worked by employees who they mistakenly believe to be exempt. This new proposal is an opportunity for employers to review and assess their pay practices, and make changes as needed to reduce the risk of liability. Employers with questions or concerns about the impact of this new rule, or wage and hour requirements in general, should consult an attorney with experience in this area.