On Thursday, March 7, 2019, the United States Department of Labor (“DOL”) unveiled its heavily anticipated new overtime rule. The newly proposed rule aims to increase the current minimum salary threshold to be exempt from the overtime mandates of the Fair Labor Standards Act (“FLSA”), from its current annual rate of $23,660 ($455 per week) to $35,308 ($679 per week). Importantly, the DOL announced that it would make no changes to its “duties test” to determine which employees’ work responsibilities are sufficient to be considered eligible for this exemption.
The increased salary threshold of $679 per week ($35,308 per year) was calculated using the same methodology that was utilized in 2004 to set what is now the current threshold. Specifically, it targets the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region in the retail sector.
The DOL explained in its executive summary that in connection with this proposed increase and in an attempt to align the regulations better with modern pay practices, the DOL also proposed allowing employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test.
While the DOL announced that it would not be making any changes to the “duties test,” the proposed rule is attempting to alter the highly compensated employee test by increasing the compensation level currently set at $100,000 to a new rate of $147,414. The highly compensated employee test relaxes the traditional “duties test” in exchange for a higher “salary level test.” In other words, an employee that meets the highly compensated employee salary test does not need to meet all of the rigors associated with the traditional duties test.
Lastly, the DOL explained that it intends to propose updates to the proposed salary thresholds every four years through notice-and-comment rulemaking. This would allow for a public comment period in advance of future changes to the salary thresholds.
Takeaways for Employers
While the proposed rule is still subject to comments from the public and will likely also face legal challenges, employers would be wise to take this time to review and analyze the classifications of their employees. It is important to plan in advance for adjustments they may want to make to employees’ compensation and duties and for communications with employees regarding those changes and the new rules.
Employers should also factor in any likely updates to state overtime rules, keeping in mind that employees would generally be subject to the rule that is more favorable to the employee. For example, in Pennsylvania, a proposed rule is due to be published later in March which would raise the minimum salary threshold for overtime for many Pennsylvania employees to $31,720 annually on January 1, 2020, to $39,832 on January 1, 2021, and to $47,892 in 2022.