On March 7, 2019, the United States Department of Labor (“USDOL”) issued its long-awaited proposed rule that would increase the minimum salary threshold to qualify for exemption from the overtime provisions of the Fair Labor Standards Act (“FLSA”) from their current level of $455 per week ($23,660 annually) to $679 per week ($35,308 annually). The proposed rule would also raise the threshold for “highly-compensated employees” from $100,000 annually to $147,414 per year. It is anticipated that the changes will extend overtime coverage to approximately one million United States workers. The proposed rule will be subject to a period of public comment and is anticipated to take effect in January 2020.

The prior rule had been in place since 2004. In May 2016, the Obama Administration sought to increase the threshold to $913 per week ($47,476 annually), but the United States District Court for the Eastern District of Texas granted an injunction prohibiting implementation and enforcement of the proposed rule on the grounds that the USDOL had exceeded its rulemaking authority. See State of Nevada, et al. v. United States Department of Labor, et al., Case No. 16-CV-0731-ALM, Docket No. 99 (E.D. Tex. Aug. 31, 2017) (holding, in part, that the dramatic increase effectively vitiated the “duties test.”). The USDOL initially appealed the decision, but agreed to hold it in abeyance while vowing to reconsider the rule.

The USDOL arrived at the $679 per week amount by utilizing the same methodology used in setting the threshold in 2004: aligning it to the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (then, and now, the South) and in the retail sector. Similarly, the USDOL proposed the $147,414 threshold for highly-compensated employees by aligning it with the 90th percentile of full-time salaried workers nationally. These amounts were also informed by over 200,000 comments received by the USDOL and listening sessions conducted by the USDOL in all five wage and hour regions throughout the country. In sum, the USDOL concluded:

The Department believes that the proposed standard salary level would help employers identify a large group of employees who perform nonexempt duties, would aid in identifying bona fide [executive, administrative and professional] employees, and would address the legal concerns that led to the invalidation of the salary level set in the 2016 final rule.

The USDOL considered, but rejected, setting different salary threshold levels for executive, administrative, and professional employees. The USDOL also rejected setting multiple salary levels based on region, industry, or employer size. Finally, the USDOL rejected a return to the “long” and “short” tests that had been in place prior to the 2004 revisions for determining exempt status.

Under the proposed rule, the salary threshold will not be static but will instead be subject to periodic increases every four years following a public notice-and-comment period on the proposed increase. The USDOL derived its authority in this regard from Congress’s directive in 29 U.S.C. 213(a)(1) to define and delimit the overtime and minimum wage exemptions “from time to time.”

The proposed rule includes a number of other changes of which employers should be aware. First, employers will be permitted to calculate certain nondiscretionary bonuses (such as those tied to productivity and profitability) and incentive payments like commissions that are paid annually or more frequently towards up to 10 percent of an employee’s salary for purposes of determining whether the threshold is met. The reason for this provision is the USDOL’s recognition that traditionally exempt employees may derive a significant portion of their annual compensation from sources other than base salary.

Second, the proposed rule would permit employers to make a final “catch-up” payment within one pay period after the end of each 52-week period to bring an employee’s compensation up to the required level. Specifically, the rule would allow an employer to pay an employee 90% of the salary level ($611.10 per week) and, if at the end of the 52-week period the salary paid plus the non-discretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 52 weeks ($35,308), the employer would have one pay period to make up for the shortfall (up to 10 percent of the standard salary level, or $3,530.80).

Third, the proposed rule also contemplates special salary thresholds being applied in Puerto Rico ($455 per week), the Virgin Islands (same), Guam (same), the Commonwealth of the Northern Mariana Islands (same), and American Samoa ($380 per week). These changes are based on the current economic climate in each of those jurisdictions.

Finally, the proposed rule would provide a special weekly “base rate” for employers in the motion picture producing industry of $1,036 per week (or a proportionate amount based on the number of days worked). This exception has been in place since 1953 to address circumstances where an employee works less than a full workweek and is paid a daily base rate that would yield the weekly base rate if six days were worked.

As before this announcement, employers should be aware that simply paying the new minimum salary threshold is not enough for an employee to qualify for exemption. The proposed rule did not affect the “duties tests.” Accordingly, to qualify for exemption, employees must still perform as their “primary duty,” duties identified as exempt under the executive, administrative, or professional exemptions. The proposed rule also did not change the mechanics of the “salary basis test.” Thus, subject to limited exceptions, in each pay period, the employee must receive at least the minimum salary, which cannot be subject to reduction because of variations in the quality or quantity of work performed.

Despite the importance of the announcement, it may not require any adjustment to payroll practices for employers operating in jurisdictions with higher minimum salary thresholds imposed by state law. Employers in New York, for instance, cannot treat an employee as exempt from the overtime provisions of the New York Labor Law unless the employee meets the applicable duties test and is paid between $832-$1,125 per week, depending on the size of the employer and its location. Similarly, employers in California must ensure that employees perform exempt duties and are paid, on a salary basis, between $45,760 per year (for those with 25 employees or less) and $49,920 per year (for those with 26 or more employees).

As always, employers should periodically review the exemption classification of their employees to ensure compliance with applicable federal, state or local law.