The U.S. Department of Labor (DOL) published a Notice of Proposed Rulemaking (NPRM) raising the Fair Labor Standards Act (FLSA) salary test threshold to $35,308 per year ($679 per week).
This is significantly lower than the $47,476 per year ($913 per week) level proposed by the prior administration in 2016, but represents a significant increase to the current FLSA salary threshold of $455 per week or $23,660 per year. The DOL estimates that the proposed threshold would expand overtime eligibility to more than a million additional U.S. workers. Other key aspects of the proposal include:
- No changes to the current FLSA duties tests for exemption classification.
- Permits nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level test provided that such bonuses or payments are paid annually or more frequently. This represents a change from the 2016 proposal which required these types of compensation payments to be made quarterly.
- Raises the salary level threshold for highly compensated employees (HCE) set at $100,000 in 2004 to about $147,000 (compared to $134,000 as proposed in 2016). The DOL proposes to set the HCE level equivalent to the 90th percentile of full-time salaried workers nationally, the same methodology used in the 2016 final rule.
- Proposes raising the salary threshold every four years through a notice and comment process, rather than through automatic updates as was the case under the 2016 final rule. This will be welcomed by employers who worried that automatic increases would see the threshold increase too rapidly, potentially eliminating exemption status in certain industries.
- Does not preempt state standards. If a state establishes a stricter standard to qualify for exemption from state overtime standards than the corresponding FLSA standard (e.g., higher earnings threshold or more rigorous duties tests), the stricter standard continues to apply for state law purposes.
The DOL will allow for 60 days of public comment to the proposed rulemaking. Once the comment period closes, the DOL will be required to review and consider all comments before finalizing and publishing the regulations. With an expected high volume of comments, it may take several months, but experts anticipate that the DOL will finalize the rules at the end of 2019 to be effective in early 2020
The change can impact employer payroll costs. We can offer a couple of suggested action steps for employers:
- Review employees currently classified as exempt who would fail the salary level test if it was raised. Reclassifying employees as a result of a rule change may mitigate possible employment-related litigation risks.
- Get a sense for how many employees would be impacted both below and above but close to the new salary level threshold as changes to classifications or pay levels can have a ripple effect.
- Review job documentation and tasks to determine employees who may be at risk. Highlight such employees and begin to review how you might respond if those employees are required to become non-exempt.
If you have questions regarding this article, please contact FGMK’s Compensation Advisory Service Practice.