In May 2016, the Department of Labor (DOL) released a Final Rule that would have increased the minimum salary required to be exempt from overtime under the Fair Labor Standards Act (FLSA). However, just before the rule was to take effect, a federal judge temporarily blocked the DOL from implementing the rule. Here is an overview and update on the status of the Final Rule:
The FLSA requires employers to pay most employees at least the federal minimum wage for each hour worked and overtime pay for all hours worked over 40 in a workweek. The FLSA allows for exemptions for certain employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs. These employees are known as "exempt" employees. To be considered "exempt," these employees must generally satisfy three tests:
- Salary-level test: Employees must earn a weekly salary that meets the minimum requirements.
- Salary-basis test: With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test: The employee's primary job duties must meet certain criteria.
On November 22, 2016, a little over a week before the Final Rule was scheduled to take effect, a federal judge issued an Order that prevented the DOL from implementing the Final Rule. The rule is currently blocked, but the Judge's Order is being appealed before the U.S. Court of Appeals for the Fifth Circuit.
Update September 5, 2017: On August 31, 2017, the federal judge permanently blocked the Final Rule. The judge concluded that the DOL exceeded its authority by raising the minimum salary so significantly that it became the determinative test for exempt status, diminishing the importance of the duties test. The latest ruling means that the minimum exempt salary requirement remains at $455 per week under federal law. The ruling also closes one of the avenues by which the 2016 Final Rule could take effect in the future. However, employers should continue to watch for any further developments in the case.
Summary of the Blocked Rule:
The blocked rule would have:
- Increased the minimum salary requirement from $455 to $913 per week for the administrative, professional (including salaried computer professional), and executive exemptions.
- Allowed certain bonuses and other incentive payments to help employers meet the minimum salary requirement.
- Increased the minimum salary requirement for the highly compensated employee to $134,004 in total annual compensation.
- Provided automatic adjustments to these minimum salary requirements every three years, beginning January 1, 2020.
Appeal Moves Forward:
On June 30, 2017, the DOL submitted its last argument asking the Court to recognize that the DOL has the authority to set a new salary level. Notably, the DOL also asked the Court not to rule specifically on whether the blocked $913-per-week salary level itself was appropriate. Instead, the DOL said it intends to follow the rulemaking process to determine a new salary level going forward if the Court allows it to do so.
New Rulemaking Process Begins:
On July 26, 2017, the DOL published a Request for Information (RFI), seeking comments from the public about the overtime rules. After the comment period for the RFI ends on September 25, 2017, the DOL will consider the feedback to draft new proposed rules (a process that typically takes several months). Here are some questions the DOL raised in the RFI:
- Should the regulations have multiple standard salary levels? If so, how should these levels be set: by size of employer, census region, census division, state, metropolitan statistical area, or some other method?
- Does the standard salary level set in the 2016 Final Rule work effectively with the standard duties test or, does it eclipse the role of the duties test in determining exemption status? At what salary level does the duties test no longer fulfill its role in determining exempt status?
- Would a test for exemption that relies solely on the duties performed by the employee without regard to salary be preferable? If so, what elements would be necessary in a duties-only test and would examination of the amount of non-exempt work performed be required?
You can review the RFI and submit comments here.
What You Need to Know:
Comply With Current Salary Requirement:
As of now, the 2016 Final Rule remains blocked. As we await developments, the minimum salary requirement for the administrative, professional, and executive exemptions remains at $455 per week under federal law. Note: A number of states, including California and New York, have minimum salary requirements that are higher than $455 per week. Check your state law to ensure compliance.
A handful of states are considering changes to their own overtime rules. For instance, the California legislature is considering a bill that would raise the state's minimum salary requirement for exemption to $3,956 per month.
Continue to watch for developments and ensure that your exempt employees meet all applicable salary and duties tests. We will continue to monitor the situation closely and provide updates on the federal rule here.