LawFlash

DOL Proposes Raising Salary Level for FLSA ‘White Collar’ Overtime Exemptions to $35,308

March 11, 2019

The US Department of Labor seeks to increase the salary levels needed to qualify as exempt under the Fair Labor Standards Act’s white collar standard and highly compensated exemptions.

On March 7, the US Department of Labor (DOL) announced its highly anticipated proposed revisions to the overtime exemptions under the Fair Labor Standards Act (FLSA). The proposed rulemaking would increase the minimum salary needed to qualify for the standard white collar exemptions from $23,660 annually ($455 per week) to $35,308 annually ($679 per week). Additionally, the DOL proposes to increase the minimum total annual compensation required to qualify for the highly compensated exemption, from $100,000 annually to $147,414 (including at least $697 per week paid on a salary basis). The proposed rule does not include changes to the FLSA’s duties tests.

The DOL is providing the public with a 60-day comment period after the proposed rule is published in the Federal Register. The DOL estimates that more than one million workers who are not classified as exempt under the current regulations will become overtime eligible under the proposed regulations without some intervening action (i.e., raising their salaries) by their employers.

Background

The FLSA’s white collar exemptions exclude certain executive, administrative, and professional employees from federal minimum wage and overtime requirements. Currently, to qualify for one of these exemptions, an employee generally must

  • be salaried, meaning that he or she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test);
  • be paid more than a specified salary threshold, currently $455 per week or $23,660 annually (the salary level test); and
  • primarily perform executive, administrative, or professional duties as provided in the DOL’s regulations (the duties test).

Additionally, under the “highly compensated test,” certain employees are exempt from the FLSA’s overtime pay requirements if they are paid total annual compensation of at least $100,000, receive at least $455 per week paid on a salary or fee basis, perform office or nonmanual work, and customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.

In 2016, the DOL issued a final rule that would have, among other things, increased the annual salary level to $47,476. Before the rule went into effect, however, a Texas district court judge declared the rule invalid and the DOL has never enforced the changes. The DOL’s 2019 proposed rule would replace the 2016 rule that never went into effect.

The Proposed Rule

Key changes in the proposed rulemaking include the following:

  • Increasing the annual minimum salary needed to qualify for the white collar exemptions to $35,308. The proposed rule allows employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of this salary level.
  • Increasing the minimum annual compensation needed to qualify for the highly compensated exemption to $147,414.

Unlike the 2016 rule, the proposed rule does not provide for automatic adjustments to the salary threshold. Instead, in the proposed rule the DOL states that it is committed to a periodic review to update the salary threshold. Any such update would continue to require notice-and-comment rulemaking.

The proposed rule does not revise the job duties tests for any of the white collar exemptions.

DOL Request for Comment

The DOL seeks comments on a variety of issues in the proposal beyond the amount of the proposed salary level. The DOL specifically requests comments on whether the salary level should be automatically updated. Additionally, commentators can be expected to focus on topics such as the DOL’s authority to set a salary level, which the Texas judge called into question in his opinion; whether the salary levels should be adjusted for different regions; and whether the proposed new salary level and current duties test work together to effectively screen out employees who are not bona fide white collar exempt employees.

Comment Deadline and Timing Implications

The 219-page proposal was posted on the DOL’s website on March 7, but it has not yet been published in the Federal Register, which will trigger the start of the comment period. We expect it to be published in the next few days. Comments will be due with 60 days of publication, so the deadline for submitting comments will likely be in early May, unless an extension to the comment period is granted. At this point, it is unclear when the final regulations will be published, but we do expect them to be issued before the end of the year. The effective date of the new regulations likely will occur at least 30–60 days after the final regulations are published.

Conclusion

The proposed revisions to the FLSA’s white collar exemptions are designed to extend overtime protections to millions of employees, particularly those in the retail, education, health services, leisure, and hospitality industries. Regardless, employers in all industries shouldconsider the following actions.

First, companies and trade associations affected by the proposal should consider submitting comments to ensure that the regulatory record reflects the true impact of any proposed changes and to shape the final rule.

Second, the increase in the compensation required to meet the proposed salary level test will likely have an economic impact. Additionally, the publicity generated by the proposed changes may cause a number of employees to question whether they are properly classified. As such, although any final regulatory change is not imminent, we recommend that companies consider auditing their current employee population to determine the impact on staffing and compensation models, and review the classification of “close to the line” positions. Changes in response to the new salary level could include raising the salary for certain employees to meet the new proposed standards, bolstering job duties, or reclassifying employees from exempt to nonexempt. Reclassifying exempt employees to nonexempt, in turn, requires considering a broad range of issues, including a communication strategy, manager and employee training, new or revised timekeeping policies and practices, scheduling, compensation structures, calculation of the overtime rate, and many other issues. Planning ahead is critical to managing the risks associated with reclassification.

Regardless of the fate and timing of the final rule, employers must remain mindful of states with overtime laws that already require higher salary levels to qualify for certain exemptions. Some states increase these exemptions every year, and employers must simultaneously comply with these state exemptions and with whatever federal minimum is implemented. For example, in order to qualify for California’s white collar exemption, an employee must receive an annual salary of at least $49,920 for large employers and $45,760 for small employers.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Chicago
Sari M. Alamuddin
Stephanie Sweitzer

Houston
Stefanie Moll

Los Angeles
John S. Battenfeld
Max Fischer
Douglas Hart
Jennifer Zargarof

Miami
Anne Marie Estevez

New York
Leni Battaglia
Christopher A. Parlo
Samuel S. Shaulson

Orange County
Carrie A. Gonell
Daryl S. Landy
Barbara J. Miller

Philadelphia
Michael J. Puma

Pittsburgh
Christopher K. Ramsey

Princeton
Thomas A. Linthorst
Richard G. Rosenblatt

San Francisco
Robert Jon Hendricks
Eric Meckley

Silicon Valley
Melinda S. Riechert
Michael D. Schlemmer

Washington, DC
Lincoln O. Bisbee
Russell R. Bruch
Susan Harthill