You May Have to Pay Exempt Employees More in 2019

With changes to the Fair Labor Standards Act (FLSA) expected this year as well as increases to minimum wage rates in certain states, employers may have to pay a higher salary to their exempt employees in 2019.

Background:

Under the FLSA, employers must pay non-exempt employees at least the minimum wage for each hour worked and overtime (1.5 times the employee's regular rate of pay) whenever they work more than 40 hours in a workweek (your state may require overtime in additional circumstances). While most employees are classified as non-exempt, there are exemptions from these requirements for bona fide professional, administrative, and executive employees. Generally, to be classified as exempt under federal law:

• The employee must receive a salary of at least $455 per week;
• That salary must be a fixed amount each week, regardless of the quality of work or number of hours worked; and
• The employee's primary job duties must involve specific responsibilities. The duties vary for each exemption.

Several states have adopted their own tests for exempt status, which are typically harder to satisfy. For example, they may have higher salary thresholds or a narrower duties test. If your employees work in one of these states, you need to apply both the state and federal tests to determine the employee's status under both sets of laws. If the employee satisfies the applicable federal test but not the state test, the employee is entitled to overtime in all the circumstances covered by state law. If the employee satisfies the applicable state test but not the federal test, the employee is considered non-exempt under federal law and entitled to overtime whenever they work more than 40 hours in a workweek.

State Increases Effective in 2019:

In some states, the minimum salary requirement for overtime exemptions increases automatically whenever the minimum wage increases. For example, employers in California and Alaska must pay exempt employees at least two times the state minimum wage. As a result, these states, along with Colorado, Maine, and New York, have increased exempt salary thresholds for 2019 since their state minimum wage increased for 2019. For employers with exempt employees working in one of these states, be sure covered employees meet the new minimum salary requirement. Remember, even if these employees meet the salary test, they must also still meet the applicable duties tests to be classified as exempt.

Other Changes in the Works:

Federal Rules:

The U.S. Department of Labor (DOL) is working on a proposed rule that is expected to increase the minimum salary requirement under federal law, and may include other changes as well. The DOL recently sent their proposal to the Office of Management and Budget for review, which means it could be released to the public as early as March 2019. After the rule is proposed, the public will be given time to comment and the DOL would consider public comments when drafting a final rule. The entire process can take several months.

This is the second time the DOL has attempted to amend existing rules. During the Obama Administration, the DOL released a final rule that would have increased the minimum salary required for exemption from $455 to $913 per week. However, just before the rule was scheduled to take effect, a federal judge blocked the DOL from implementing it. The new rule is expected to increase the minimum salary requirement, but not by as much as the blocked rule would have. There could be additional changes, even to the duties tests, though those are less likely.

State Rules:

• Pennsylvania: Pennsylvania is in the process of changing its rules for determining who is exempt from overtime. A proposed rule was published in June 2018, and it would change the state's minimum salary and duties tests. A final rule is expected in 2019.
• Washington: 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. The next step would be a proposed rule.
• Oregon: Oregon is another state that ties its minimum salary requirements to the minimum wage. In Oregon, the monthly minimum salary required for exemptions is equal to (2080 x the minimum wage)/12 months. The state's minimum wage rates are scheduled to increase on July 1, 2019, so this change may affect some employers with exempt employees.

Conclusion:

Make sure your exempt employees continue to meet all applicable federal and state tests for exemption. If your exempt employees' salaries fall below the new minimum required, you will generally either have to: raise their salaries to the new requirement, or reclassify them as non-exempt and pay them overtime as required by federal and/or state law.