The Department of Labor’s (“DOL”) Wage and Hour division issued a highly anticipated notice of proposed rulemaking (NPRM) on March 7, 2019, seeking to raise the minimum salary threshold to qualify for the Fair Labor Standard Act’s (“FLSA”) “white collar” exemptions for executive, administrative, or professional (“EAP”) workers. The proposed rule would raise the current salary threshold from $455 per week ($23,660 annually) to $679 per week ($35,308 annually) for most EAP workers, and for “highly compensated employees” from $100,000 per year to $147,414 per year. The proposed rule would also allow employers to consider certain bonuses and incentive payments in calculating the salary threshold. Although the proposed rule will be subject to comments from interested parties and potential revisions from the DOL before it takes effect, many employers are evaluating their workforces in order to prepare for the DOL’s contemplated changes.
This recent NPRM marks the Department of Labor’s second attempt at raising the salary threshold since 2004. The Department’s previously proposed update was invalidated in 2016, following lengthy litigation in the Eastern District of Texas.
In addition to raising the minimum salary requirements for exempt “EAP” workers, the Department’s proposed rule would allow employers to consider nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the salary threshold, provided that such bonuses are paid annually or more frequently. The Department of Labor explained that this allowance is “an attempt to align the regulations better with modern pay practices.” See NPRM, 29 CFR 541, RIN 1235-AA20.
The proposed rule would also increase the minimum salary threshold for “highly compensated employees” to qualify as exempt, raising the current threshold of $100,000 to $147,414 per year, “of which at least $679 must be paid weekly on a salary or fee basis.” The Department believes that this increase will result in an estimated 200,000 currently exempt “highly compensated employees” becoming eligible for overtime compensation.
Notably, the proposed rule would not automatically increase the required salary for exempt “EAP” workers. Rather the Department has clarified that while it will seek frequent updates—every four years—to the newly proposed salary threshold, it intends to do so through traditional notice and comment rulemaking, rather than the automatic increase mechanism proposed by the invalidated 2016 rule.
What Should Employers do to Prepare?
Audit your Workforce
Employers should take steps now to audit their workforce and determine whether employees currently classified as nonexempt will fall below the newly proposed salary threshold or fail to qualify as “bona fide” executives, administrators, or professionals under the primary duties test. Because the proposed rule is unlikely to take effect until at least January 2020, it is a great time for employers to abate misclassification mistakes and determine next steps forward for currently exempt employees, especially those making less than the proposed $35,308 threshold.
Consider Increasing the Salary of Certain Employees
Employers may choose to raise currently exempt employees’ salaries above the $35,308 threshold to maintain their exempt status if the employees’ current salary is in close proximity to the proposed threshold and they work significantly more than forty hours per week. It could potentially be less expensive and less of an administrative burden for an employer to increase an employee’s salary to meet this threshold, rather than paying large amounts of overtime compensation.
As an alternative to salary increases, employers may want to consider the reclassification of currently exempt employees whose salaries are under the proposed threshold of $35,308 per year. However, the employer should make certain preliminary considerations regarding an appropriate hourly rate, the amount of authorized overtime, potential workforce morale issues, and the determination of eligibility for fringe benefits based on exempt/nonexempt status.
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