DOL Proposes New Overtime Rule, Increasing Required Salary Level for Exempt Employees
By: Mark Swerdlin, Fiona Ong & Parker Thoeni
In the latest development in the long saga involving the overtime rule, the Department of Labor has now issued its long-awaited proposed revision to the regulations governing which employees are exempt from the requirement to pay overtime for all hours worked over 40 in a workweek.
The Current Rule: The current overtime rule, which took effect in 2004, sets forth three tests, all of which must be met in order for a white-collar employee to be deemed exempt: (1) the employee must be paid on a salary basis; (2) the employee’s salary must be at least $455 per week (equaling $23,660 per year); and (3) a duties test specific to the exemption in question – executive, administrative or professional (EAP). There is also a highly-compensated employee (HCE) exemption, under which an employee must make at least $100,000 per year (in addition to being paid at least the standard salary level per week on a salary or fee basis) and perform at least one exempt duty.
The First Attempt to Revise the Rule: As employers may remember, the DOL issued a revision to the overtime rule in 2016. The salary levels for the EAP and HCE exemptions were vastly increased – to $47,476 per year ($913 per week) and $134,004, respectively. The rule also contained an automatic increase to the salary levels every three years. There was immediate outcry from the business community, and litigation ensued. Only days before the rule was to take effect, it was enjoined by a federal court in Texas, which found that the new salary level exceeded the DOL’s authority. Under the Trump administration, the DOL then indicated that it would issue new regulations, for which the business community has been waiting.
The New Proposed Rule: The proposed rule rescinds the 2016 rule and contains changes to the salary levels for the EAP and highly compensated exemptions, so that, according to the DOL, they maintain their usefulness in “screening out the obviously nonexempt employees.”
The DOL proposes to set the EAP salary level at $679 per week ($35,308 per year). In setting this number, the DOL used the same methodology that was used to set the salary level in 2004 – the 20th percentile of earnings for full-time salaried workers in the lowest income U.S. Census region (currently the South) and in the retail sector, projected forward to January 2020, when the DOL expects the final rule to take effect. By using the same methodology to calculate the salary levels as it did in 2004 – which was never challenged – the DOL is admittedly hoping to avoid further litigation over its attempts to increase the salary level.
In addition, the DOL proposes to set the required annual salary for the HCE exemption at $147,414. As under the 2004 rule, this number is based on the 90th percentile of full-time salaried workers nation-wide (rather than the regional data used for the EAP exemptions).
As it had previously done in the 2016 regulations and for the stated purpose “to align the regulations better with modern pay practices,” the DOL has included a provision allowing employers to count nondiscretionary bonuses, incentives and commissions for up to 10% of the EAP salary threshold. Examples of such payments cited by the DOL include nondiscretionary incentive bonuses tied to productivity and profitability. Under the proposed rule, these payments must be made on an annual (using any 52-week period or, by default, a calendar year) or more frequent basis. In addition, if an employee’s salary plus these additional payments do not reach $35,308 for the year, the employer may make a “catch-up” payment no later than the next pay period after the end of the year. This catch-up payment would only count towards the prior year’s salary, and may not be counted in the year it was paid. (Of note, the HCE exemption already permits employers to count commissions, nondiscretionary bonuses and other nondiscretionary compensation towards the total required salary above the standard weekly salary level, and permits a catch-up payment in the month after the end of the year).
Of particular note, the DOL is not including automatic increases to these salary levels as part of this proposed rule. Rather, it states that it will propose updated salary levels every four years, using the regulatory notice and comment process. Those updates will utilize the same methodology as the 2004 and now-proposed rule to set the salary levels described above.
The DOL projects that, without intervening action by their employers, approximately 1.1 million individuals will become eligible for overtime under the revised EAP salary level, while approximately 200,000 individuals will do so under the revised HCE salary level. (This is in contrast to the 2016 rule, which would have affected 4.2 million workers.)
Interestingly, in its extended analysis of the anticipated impact of this proposed rule, the DOL acknowledges that there may be some negative consequences. For example, employers may incur ongoing managerial costs related to developing work schedules and monitoring hours worked to minimize or avoid overtime. Newly non-exempt workers may lose the flexibility in scheduling that they enjoyed as exempt employees. In addition, they may lose certain benefits offered only to salaried exempt employees. The DOL also acknowledges that the increased labor costs could result in higher prices for consumers and/or reduced profits for employers. And, of course, employers may seek to reduce costs by reducing workers’ hours in order to avoid overtime – thereby disadvantaging lower-wage workers – while exempt workers may see an increase in workload to make up for those hours.
What Happens Now: There will be a 60-day comment period following publication of the Notice of Proposed Rulemaking in the Federal Register. You may submit comments electronically at https://www.regulations.gov/. Once the 60-day period has closed, the DOL will take some time to consider the comments and then subsequently issue the final rule. The DOL has also posted a Fact Sheet and Frequently Asked Questions on the proposed rule to its Overtime Rule webpage.
Notably, many employers had already come into compliance with the last version of the revised overtime rule, so the revised rule should have no impact on them. Employers that were less proactive at that time may await the issuance of the final rule before taking any steps. There will be some period of time after the final rule is issued before it takes effect, which will allow for those employers to plan for compliance.