On March 7, 2019, the U.S. Department of Labor (DOL) released a proposed rule that would increase the minimum salary required to qualify for exemptions from overtime for administrative, professional, executive, and highly compensated employees. Here are some answers to some frequently asked questions about the proposed rule.
Q: What are the exemptions from overtime for administrative, professional, executive, and highly compensated employees?
A: The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain administrative, professional, and executive employees. To be considered "exempt," these employees must generally satisfy specific salary and duties tests:
- Meet the minimum salary requirement (currently $455 per week);
- With very limited exceptions, the employer must pay the employee their full salary in any week they perform work, regardless of the quality or quantity of the work; and
- The employee's primary duties must meet certain criteria.
There is also a special exemption for "highly-compensated employees" who are paid total annual compensation of at least $100,000 and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
Q: What did the DOL propose changing?
A: The proposal would make four significant changes to the FLSA:
New salary requirement:
Under the new proposal, the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions would increase from $455 per week to $679 per week (equivalent to $35,308 per year).
This means that in order to qualify for an administrative, professional, and executive exemption from FLSA's overtime requirements, employees must be paid a minimum weekly salary of $679 and continue to perform the applicable job duties. Exempt computer professional employees may also be paid hourly, if it is at least $27.63 per hour, which doesn't change under the new rule.
Inclusion of nondiscretionary bonuses in minimum salary requirement:
Under the proposal, employers could use nondiscretionary bonuses, incentive payments, and commissions, to satisfy up to 10 percent ($67.90) of the minimum salary requirement for the administrative, professional, and executive exemptions, if these forms of compensation are paid at least annually.
The proposal would permit employers to make a final "catch-up" payment within one pay period after the end of the year to bring an employee's compensation up to the required level. Thus, under the proposal, each pay period an employer must pay the exempt executive, administrative, or professional employee 90 percent of the salary level ($611.10 per week), and if at the end of the year the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal at least $35,308, the employer would have one pay period to make up for the shortfall.
Highly compensated employee exemption:
The proposal would increase the total annual compensation requirement for the "highly compensated employee" exemption to $147,414 per year (at least $679 must be paid on a weekly salary basis).
For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement, but there is no cap. This wouldn't change under proposal. Thus, as long as the employer pays the employee at least $679 on a weekly salary basis, the employer would be able to count these other forms of compensation toward meeting the minimum total compensation ($147,414).
Note: Several states don't permit employers to use the highly compensated employee exemption to qualify for exemption from overtime under state rules.
Future minimum salary increases:
The DOL intends to update the minimum salary requirements every four years, using the same rulemaking process, which involves publication in the federal register and an opportunity for public comment.
Q: What are nondiscretionary bonuses?
A: Nondiscretionary bonuses are typically those announced or promised in advance. For example, if you announce at the beginning of the year that employees will be entitled to a bonus for meeting certain production goals, this would be considered a nondiscretionary bonus. By contrast, discretionary bonuses aren't announced or promised in advance. For example, if you decide at the end of the year to surprise employees with a bonus, this would generally be considered a discretionary bonus. Discretionary bonuses may not be counted toward meeting the minimum salary requirement.
Q: Didn't the DOL try to change the overtime rule a few years ago?
A: Yes. During the Obama Administration, the DOL published a final rule that would have raised the minimum salary requirement for the administrative, professional, and executive exemptions to $913 per week, but a court blocked that rule from taking effect in 2016.
Q: Did the DOL propose any changes to these tests?
A: The DOL did not propose any changes to the duties tests.
Q: When would this rule become effective?
A: The changes wouldn't take effect until after the DOL publishes a final rule. Before a final rule can be published, the proposal is subject to a 60-day public comment period, which will end on May 21, 2019. After the 60-day period ends, the DOL will then review the comments to determine whether changes should be made before publishing a final rule. The process could take several months.
Q: If this proposal were to become final, what would my options be if my exempt employees' salaries are currently below $679 per week?
A: If the rule becomes final and your exempt employees fall below the new salary threshold, you would generally have two options: (1) reclassify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek; or (2) raise their salary to meet the new requirement.
Q: My employees regularly work more than 40 hours per week, so my compensation costs would go up with either of those options. Are there any cost-neutral options?
A: If the potentially impacted employees regularly work more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium. Here's an example:
An exempt employee's current salary is $550 per week, the employee regularly works 50 hours per week, and you want to reclassify this employee as a non-exempt employee but keep your costs the same. You would calculate the cost-neutral hourly wage as follows:
$550 weekly salary
[40 hours + (10 overtime hours x 1.5)]
= $10 hourly rate
This employee would be paid $10 per hour for the first 40 hours and $15 per hour ($10 x 1.5) for each hour of overtime. If the employee works 50 hours, then they would receive $550 in total compensation ($400 in straight-time earnings and $150 in overtime earnings). If the employee works more than 50 hours, then they would need to be paid additional overtime (at a rate of $15 per overtime hour). Of course, if they work less than 50 hours, they would earn less than $550 for the week. Remember, whatever hourly rate you decide to pay reclassified employees, it must meet or exceed the highest applicable minimum wage (federal, state, or local). If the result above is less than the applicable minimum, you would need to raise the rate of pay to meet the requirement.
Q: How many workers would be affected by the proposed changes?
A: The DOL estimates about 1.3 million workers would become newly eligible for overtime unless employers increase their salaries to maintain their exempt status.
Q: How would I be affected if my state has its own salary requirements for the exemptions from overtime?
A: The impact may depend on the state and the exemption applied. Where state and federal rules conflict, employers must generally comply with the rule more generous to the employee. Therefore if the state has a higher minimum salary requirement for a comparable federal exemption, the state salary threshold would apply. Currently, eight states have minimum salary requirements that exceed the current federal minimum ($455 per week) for one or more of the exemptions. These states are:
- Connecticut (short test)
- Iowa (short test)
- New York
In some of these states, the state's minimum salary requirement will also exceed $679 per week for one or more of the exemptions, so employers in these states may see less of an impact than employers in states that have a minimum salary requirement that will fall short of $679. Check your state rules to ensure compliance.
Keep in mind that some states are already weighing increasing their minimum salary requirements for exemption. For example, Pennsylvania is in the process of changing its rules governing who is exempt from overtime. A proposed rule was published in June 2018. In October 2018, Washington released a "pre-draft" proposed rule that would change the state's minimum salary and duties tests and sought the public's comments.
Note: State rules may prohibit employers from using bonuses to satisfy part of the salary requirement. Therefore, to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Check your state law to ensure compliance.
Q: Are there any steps I should consider taking now?
A: Here are some steps to consider:
- Review current classifications. Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.
- Evaluate the potential impact on your business. This includes identifying those employees who currently earn less than $679 per week and are classified as exempt from overtime. If the rule becomes final and your exempt employees fall below the new salary threshold, you would have two options:
- Reclassify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek; or
- Raise their salary to meet the new requirement.
Evaluate the potential impact on your business by comparing the costs of raising an exempt employee's salary to reclassifying the employee as non-exempt and paying them overtime when they work more than 40 hours in a workweek. If an employee's salary is well below the new proposed minimum and they rarely work overtime, it may be more cost-effective to reclassify them as non-exempt. Conversely, if an employee's salary is closer to the new proposed minimum or they frequently work overtime, you may want to consider raising their salary to maintain the exemption.
- Keep an eye on state rules. Some states have their own salary requirements that already exceed the federal proposal. Some other states may decide to increase their salary thresholds based on the new federal proposal. Where state and federal rules conflict, employers must generally comply with the one more generous to the employee.
- Watch for updates. We will be monitoring the status of the proposed rule closely and updating our FLSA and Overtime Rule Guide as developments unfold.
The proposed rule could have a significant impact on many small employers. Make sure you evaluate the potential impact on your business now so you can come up with a plan should the rule become final.