What You Should Know
By: Allison Coccia
The US Department of Labor (USDOL) has issued its anticipated revised notice of proposed rulemaking to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees, or the “Overtime Rule” as we know it.
The new proposed rule would revise the Fair Labor Standards Act (FLSA) which implements the exemption from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales and computer employees.
The USDOL issued its original proposal back in 2016, raising the salary threshold under-which employees are eligible for overtime pay from $23,660 annually to $47,476 annually, requiring automatic increases to the minimum threshold every three years.
As you might imagine, numerous states and over fifty business groups, including the US Chamber of Commerce filed suit. The proposed rule was invalidated in 2017 in a decision by the U.S. District Court of the Eastern District of Texas which argued that the greatly increased threshold essentially rendered the duties test inoperable, basing overtime exemptions solely on salary tests. “This significant increase would essentially make an employee’s duties, functions, or tasks irrelevant if the employee’s salary falls below the new minimum salary level. As a result, entire categories of previously exempt employees who perform “bona fide executive, administrative, or professional capacity” duties would now qualify for the EAP exemption based on salary alone.”1
In addition, the agency received 214,149 comment letters in response to the proposed rule. Those in opposition took issue with the drastic threshold increase as well as its effect on the duties test, the lack of socioeconomic consideration, the automatic salary threshold increase, the burdens placed on employers, and most importantly, the hardships placed on employees.
Despite the rule’s ultimate invalidation in court, many community banks and their employees bore its impact, because most implemented the new threshold, as the court’s preliminary injunction came only days before the required implementation date.
REVISED OVERTIME RULE
In September of 2018, in response to the court’s findings and thousands upon thousands of comment letters in opposition, the USDOL held listening sessions across the country in Atlanta, GA; Seattle, WA; Kansas City, MO; Denver, CO; Providence, RI; and Washington DC.
The USDOL’s newly revised overtime rule proposal increases the overtime threshold from $23,650 annually to $35,308 annually; increases the total annual compensation requirement for “highly compensated employees” (HCE) from $100,000 to $147,414 per year; and allows employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level. There are no changes to the duty’s tests and no automatic increases to the salary threshold.2
Issued on March 7, 2019, the public will have 60 days to provide comment on the revised proposal once published in the Federal Register.
Fact Sheet: Notice of Proposed Rulemaking to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees
*Excerpts below are taken directly from the USDOL Wage and Hour Division Fact Sheet*
KEY PROVISIONS OF THE PROPOSED RULE
The NPRM focuses primarily on updating the salary and compensation levels needed for these workers to be exempt. Specifically, the Department proposes to:
- Increase the standard salary level to $679 per week (the equivalent of $35,308 annually for a fullyear worker), up from the currently enforced level of $455 per week;
- Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to $147,414 annually, up from the currently enforced level of $100,000 annually; and
- Allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, provided these payments are made on an annual or more frequent basis, while inviting comment on whether the proposed 10 percent cap is appropriate, or if a higher or lower cap is preferable. Additionally, the Department is asking for public comment on the NPRM’s language for periodic review to update the salary threshold. An update would continue to require notice-and-comment rulemaking.
STANDARD SALARY LEVEL
The Department proposes to increase the standard salary level to $679 per week ($35,308 for a full-year worker). The proposed amount accounts for wage growth since the 2004 rulemaking, projected forward to January 1, 2020, the approximate date a final rule is anticipated to be effective. The Department proposes to update the standard salary level set in 2004 by applying the same method used to set that level in 2004 to current data — i.e., by looking at the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (then and now the South), and/or in the retail sector nationwide.
HCE TOTAL ANNUAL COMPENSATION REQUIREMENT
The Department proposes to increase the total annual compensation requirement for highly compensated employees to $147,414 per year. This is an increase over the level of $100,000 set in 2004. To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $679 per week on a salary or fee basis (without regard to the payment of nondiscretionary bonuses and incentive payments). The proposed HCE annual compensation level is set using the same method used in the 2016 final rule — i.e., equivalent to the 90th percentile earnings of full-time salaried workers — projected forward to January 1, 2020.
Experience has shown that fixed earning thresholds can become substantially less effective over time. Accordingly, the Department is asking for public comment on the NPRM’s language for periodic review to update the salary threshold. An update would continue to require notice-and-comment rulemaking.
TREATMENT OF NONDISCRETIONARY BONUSES AND INCENTIVE PAYMENTS
The Department also proposes to permit employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, they must make such payments on an annual or more frequent basis. Additionally, the Department has invited comment on whether the proposed 10 percent cap is appropriate, or if a higher or lower cap is preferable.
If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year (52-week period) to retain his or her exempt status, the Department permits the employer to make a “catch-up” payment within one pay period of the end of the 52-week period. This payment may be up to 10 percent of the total standard salary level for the preceding 52-week period. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.
Disclaimer: This proposed regulation has been submitted to the Office of the Federal Register (OFR) for publication, and is currently pending placement on public inspection at the OFR and publication in the Federal Register. This version of the proposed regulations may vary slightly from the published document if minor technical or formatting changes are made during the OFR review process. Only the version published in the Federal Register is the official proposed regulation. The public will have 60 days to comment on the proposed regulation; the comment period will begin on the date of publication in the Federal Register.
For additional routine information outside of the rulemaking, visit the Department of Labor’s Wage and Hour Division Website: www.wagehour.dol.gov and/or call their toll-free information and helpline. 1-866-4-USWAGE (1-866-487-9243).
Additional sources used in this article: