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Back Again: DOL Issues New Proposal Raising Federal Salary Minimum

Revisiting an issue remaining from the last administration, the US Department of Labor (“DOL”) on Thursday evening issued a new proposed rule raising the minimum salary and compensation requirements for overtime exemptions under the federal Fair Labor Standards Act (“FLSA”).

The DOL estimated that the proposed higher minimums would make more than one million employees eligible for overtime under the FLSA.

The new proposal rescinds and replaces a rule that the Obama Administration adopted in 2016. It provided for even higher minimums, but never took effect as a result of a court injunction. For the past two years, under the Trump Administration, the DOL reviewed the issues to decide whether to scrap the 2016 rule entirely, propose a new rule, or take any other action on overtime issues. In the process, DOL received extensive public input from several in-person “listening sessions” around the nation, along with more than 200,000 comments.

Under the FLSA, the DOL currently enforces a minimum salary threshold of $455 per week (or $23,660 annually) for employees to qualify as overtime exempt under the federal executive, administrative, and professional exemptions. Employees also must satisfy a duties test to qualify for those exemptions. If employees do not meet those these tests, the FLSA requires overtime pay after 40 hours in a workweek. The DOL set this minimum salary level in 2004. It previously had not been updated since 1975.

In 2016, the DOL under the Obama Administration adopted a rule requiring a minimum salary of $913 per week (or $47,476 a year) under the executive, administrative, and professional exemptions. It also mandated automatic adjustments every three years. That rule was to become effective on December 1, 2016. However, in Nevada, et al. v. US Dept. of Labor, the US District Court for the Eastern District of Texas blocked the rule on November 22, 2016. Its ruling invaliding the 2016 regulations has been on appeal to US Fifth Circuit Court of Appeals in New Orleans. That court put the appeal on hold pending this anticipated rulemaking by the DOL. In the meantime, the DOL continued enforcing the 2004 FLSA regulations.

Now, in place of the 2016 regulations, the DOL proposes a higher minimum salary level, but one lower than the level that the Obama Administration ordered. The DOL’s new proposal would increase the minimum salary level from $455 to $679 a week (or $35,308 per year). The amount of the increase takes into account inflation since the 2004 increase. The DOL does not propose automatic increases, but rather seeks to update the minimum through periodic reviews that then would involve public notice and comment. The DOL’s new proposal makes no changes to the duties tests for the executive, administrative, or professional exemptions.

For the most part, employers have had to meet the minimum pay threshold through payment of a salary – without considering other types of compensation. In a major change, the DOL’s new proposal would allow employers to count nondiscretionary bonuses and incentive payments, as well as commissions, to satisfy up to 10 percent of the minimum salary amount, provided they pay such amounts annually or more frequently. The Obama Administration’s 2016 regulations also contained a similar provision, as long as the payments were made at least quarterly.

The DOL’s proposal also addresses the highly compensated employee exemption. Adopted in 2004, this federal FLSA exemption covers highly paid employees who customarily and regularly perform one or more exempt executive, administrative, or professional duties. The 2004 regulations required at least a $100,000 annual compensation level. The 2016 regulations increased the minimum level to $134,004 a year. The new proposal seeks to continue the same methodology as the 2016 rule for setting this exemption’s minimum pay level – the 90th percentile of full-time salaried workers nationally. Projected forward to 2020, the DOL now proposes a minimum annual compensation level of $147,414 for the highly compensated employee exemption.

Additionally, the DOL proposes changes in the lower special salary levels set for certain US territories. It also seeks to update the base rate for exempt employees in the motion picture producing industry to $1,036 per week (or a proportionate amount based on the number of days worked), for employees who meet the duties tests for the executive, administrative, or professional exemptions. Again, the DOL proposes to revisit the minimum pay requirements in the future, but to do so regularly every four years, but through the regulatory rulemaking notice-and-comment process.

The Department encourages any interested members of the public to submit comments about the proposed rule electronically at www.regulations.gov, in the rulemaking docket RIN 1235-AA20. Once the rule is published in the Federal Register, the public will be able to submit comments for 60 days in order for those comments to be considered.

If adopted, the rules would result in some currently overtime exempt employees becoming eligible for overtime under the FLSA and, in turn, possibly under state law. In those situations, employers would need to raise salaries (or perhaps other pay) to at least the new minimum levels to maintain the overtime exemption – as long as an employee also meets the duties tests. In some cases, employers may need to analyze whether simply to convert an employee to non-exempt status and, if so, at what pay rate. Changes in compensation require certain notices in some states. In addition, reclassification to non-exempt status may make employees subject to other requirements, such as timekeeping, meal and rest period requirements, and particular itemized wage statement mandates under state laws. To avoid overtime costs, employers also may need to explore reorganizing workloads, adjusting work schedules, and spreading work among employees. These decisions may be difficult, and require careful study and strategic implementation.

Employers also must consider state laws that may impose higher standards. They must comply with the federal FLSA, as well as any stricter state requirements. Some states, such as California and New York, impose higher minimum salary thresholds than the FLSA. Currently, California employers with 26 or more employee must pay a minimum monthly salary of $4,160 (or $49,920 per year) under the executive, administrative, and professional exemptions. In 2022, when California’s minimum wage reaches $15 per hour for those employers, the minimum salary amount will be $5,200 per month (or $62,400 per year). California’s rates thus will remain higher than under the FLSA. Many states, including California, do not recognize a highly compensated exemption at all. Moreover, states also can have their own rules on what compensation counts toward a minimum salary requirement, so the DOL’s proposal to count bonuses and commissions may not help employers faced with different state law requirements.

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