• The classification of approximately 1.3 million exempt employees would change to non-exempt under the new levels. Employers should begin tracking the hours of affected employees now and should consider several strategies for implementing the change.

On March 7, 2019, the U.S. Department of Labor (DOL) issued its much-anticipated Notice of Proposed Rulemaking (NPRM) for amending the federal Fair Labor Standards Act (FLSA) regulations for exemptions from overtime pay requirements for the so-called “white collar” exemptions. The Obama Administration had previously published a regulation that would have more than doubled the minimum salary level for executive, administrative, and professional employees to be classified as exempt from overtime and minimum wage requirements (the EAP exemption) and increased the minimum salary level by a third for highly compensated employees (the HCE exemption), with further automatic increases every three years (the “2016 Final Rule”). On November 22, 2016, just nine days before that regulation would have become effective, a United States District Court in Texas issued a nationwide preliminary injunction against enforcement of the 2016 Final Rule, followed by a permanent injunction on Aug. 31, 2017. The current salary minimum for the EAP exemption is $23,660, below the federal poverty level for a family of four, and there was widespread support among both employers and employees for increasing that minimum. Until publication of the NPRM, however, uncertainty reigned about what level the Trump Administration’s DOL would propose. For EAP employees, the DOL has proposed a minimum salary level almost at the midpoint between level sought by the 2016 Final Rule and the current level, and it has proposed raising the minimum salary for highly compensated employees above the salary level first stated in the 2016 Final Rule.

In this NPRM, the DOL proposes to formally rescind the 2016 Final Rule. It asserts that its new proposed rule that has been formulated “using a longstanding commonsense methodology” and that is “based on broad-based input.” The Proposed Rule would increase the minimum salary level required for the EAP exemption to $35,308 annually and for the HCE exemption to $147,414 annually. The NPRM also proposes setting a new four-year cycle for increases in the minimum salary level, but through a notice-and-comment process rather than automatically. The DOL estimates that, under this change, 1.3 million currently exempt employees would become nonexempt under the proposed changes. Members of the public may submit comments on the NPRM on or before May 6, 2019.

Key Provisions of the NPRM

• Increasing the minimum salary required for the EAP exemption from $455 per week or $23,660 annually to $679 per week or $35,308 annually, calculated based on the 20^th percentile of wages for full-time salaried employees in the lowest-wage Census Region. The 2016 Final Rule, by contrast, set the standard level at approximately the 40^th. In the Proposed Rule, the DOL notes that it has determined that magnitude of increase in the 2016 Final Rule was inappropriate and that the 2004 standard salary level should be updated by applying the same methodology used in 2004. The DOL calculated the minimum salary level based on 2017 wage data, projected forward to January 2020, the date by which the final rule is expected to be published and become effective.
• Increasing the minimum total annual compensation for the HCE exemption from $100,000 annually to $147,414 annually, calculated based on the 90^th percentile of wages for full-time salaried employees nationally. For highly compensated employees, the DOL has proposed adopting the same methodology used in the 2016 Final Rule: setting the level equivalent to the 90^th percentile of full-time salaried workers nationally. The DOL applied this method to 2017 data and projected forward to January 2020 to calculate the $147,414 annual salary minimum.
• Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the minimum salary required for the EAP exemption, provided these payments are made on an annual or more frequent basis. This element was introduced in the 2016 Final Rule, provided bonuses were paid at least quarterly. The DOL proposes to retain it with additional leniency on the timing of bonus payments, noting that such nondiscretionary bonuses and incentives are an important part of many employers’ compensation systems. For the HCE exemption, employees must be paid a salary at or above the minimum EAP level ($35,308), although nondiscretionary pay can be included in meeting the annual compensation requirement of $147,414.
• Allowing employers to make a final “catch-up” payment within one pay period after the end of each 52-week period to bring an employee’s salary to the required level for the EAP exemption. Employers would be required to pay exempt EAP employees at least 90 percent of the minimum salary level each pay period but could make up the shortfall in a catch-up payment in order to qualify the employee for the exemption.
• Updating the EAP and HCE required salary levels every four years through notice-and-comment rulemaking.
• Applying a special salary level to Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands, a separate salary level to American Samoa, and an updated special weekly base rate to the motion-picture industry.

Background

The FLSA mandates that employers pay employees a minimum hourly wage and also pay premium overtime at 1.5 times the employee’s regular rate for all hours worked over 40 in a workweek, unless the employees are classified as exempt from these requirements. The EAP regulations set forth tests for exemption from these requirements. For an employee to qualify for the EAP exemption, three tests must be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount, currently set at $455 per week (or $23,660 annually) (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”). For an employee to qualify for the HCE exemption, the employee (1) must earn a total annual compensation of $100,000 or more, which includes at least $455 per week paid on a salary basis; (2) must have primary duties that include performing office or non-manual work; and (3) must customarily and regularly perform at least one of the exempt duties of an EAP exempt employee.

The current required salary and compensation levels were set by the DOL in a 2004 Final Rule. An appeal to the United States Court of Appeals for the Fifth Circuit of the injunction against and invalidation of the 2016 Final Rule is being held in abeyance. Currently, the DOL is enforcing the salary and compensation levels set back in 2004.

The new NPRM was developed after consideration of the District Court’s decisions, public comments received in response to a request for information issued by the DOL in 2017, and feedback received at public listening sessions held by the DOL around the country. Ultimately, the DOL has issued the NPRM proposing to increase the minimum salary level for the EAP exemption by almost 50 percent above current levels, almost at the midpoint between current level and the level set in the 2016 Final Rule.

What Employers Should Do Now

Employers and other members of the public are encouraged to submit comments on any aspect of the NPRM of concern to them. For planning purposes, however, employers should review how the new salary levels will impact their business and their employees if the proposed levels are adopted in a final regulation.

The first step is reviewing the salary levels of employees who are currently classified as exempt employees but earn less than projected new minimum of $35,308 annually—or, if the exemption is based solely on being classified as a highly compensated employee, earn less than the projected $147,414 annual minimum compensation. Employers should require employees in this cohort to start keeping records of the hours they work each week. This information will allow employers to evaluate the comparative costs of paying those employees overtime premium pay or increasing the employees’ salary to the new minimum levels. Employers that are unable to increase payroll costs may need to limit the overtime hours worked by these employees and consider transferring some of their duties to other exempt employees earning above the new minimum salary level.

Employers may consider several strategies for implementing these changes:

• For employees who will be converted from exempt to non-exempt, new record-keeping requirements will apply due the new non-exempt classification. In terms of costs, however, the threshold issue will be whether the employee in fact works overtime with any frequency. For employees who routinely work no more than 40 hours per week, the change in classification may have minimal impact. Employers can also consider keeping those employees as salaried employees, rather than converting them to hourly workers. Employers are permitted to pay non-exempt employees a salary for the first 40 hours of work per week, and then calculate and pay overtime for any hours over 40 in a work week based on the employee’s regular rate for that week. This approach is often preferred for non-exempt employees who infrequently work overtime. The compensation such employees receive is the same as if they were paid on an hourly basis, but it may reduce some of the morale issues that can arise when a salaried employee is converted to an hourly employee.
• For employees who meet the duties tests for an exemption, whose salaries are close to the new salary level, and who regularly work overtime, it may be most cost-effective for employers to raise their salaries to the new minimum salary levels. Employers should keep in mind that, if these employees receive nondiscretionary bonuses as part of their compensation, those amounts must be included in the regular rate of pay for non-exempt employees. (Note that, under the FLSA, nondiscretionary bonuses include those that are announced to employees to encourage them to work more steadily, rapidly or efficiently, if the employer has announced the method of calculation of the bonus, even if the employer retains discretion as to whether to pay the bonus.) Nondiscretionary bonuses will thus increase the overtime rate for work weeks that fall in the performance period on which the bonus is based. When the bonus is paid, the employer will also need to make a true-up overtime payment to cover overtime hours worked during that period. These compensation elements should be included in the evaluation of comparative costs of raising the salaries of affected employees to retain their exempt status versus converting them to non-exempt employees.
• If it is too costly to have a junior or mid-level non-exempt employee work overtime, higher-level exempt employees may need to take responsibility for those work commitments. Employers must be careful, however, not to jeopardize the exempt status of those employees by diluting the exempt nature of their primary duties.
• If the increase in minimum salary level will result in a significant number of employees becoming eligible for overtime, some employers may decide to bring on additional workers or redistribute work hours across current staff to reduce the number of employees who work more than 40 hours a week.
• Employers may also choose to implement measures that increase the efficiency of their workplaces to cut down on the need for overtime. For example:

- Reconsider frequent staff meetings that consume work time.

- Evaluate whether travel to an in-person meeting is necessary or whether a video conference call or use of shared-screen technology may be sufficient.

- Scrutinize whether and how many non-exempt employees need to participate in calls or meetings.

Finally, employers should also keep in mind that some states and localities, including California and New York state, will continue to set a higher bar for exempt classifications under more stringent duties tests or higher minimum salary requirements.