On March 7, the US Department of Labor announced a much-anticipated Notice of Proposed Rulemaking to amend the Fair Labor Standards Act (FLSA) overtime rule. The move comes more than two years after an Obama rule raising the overtime exemptions threshold was blocked by the courts.

The FLSA requires covered employers to pay each non-exempt employee at least the federal minimum wage (currently $7.25 per hour), and 1.5 times his or her regular hourly wage for all time worked over 40 hours in a week. Generally, employees of enterprises that have an annual gross volume of sales made or business done of $500,000 or more are covered by the FLSA.

EAP exemptions. The FLSA provides exemptions from the general overtime rule for any person employed in an executive, administrative, or professional  capacity, or EAP, if all the relevant tests relating to the employee’s duties and responsibilities, as defined in FLSA regulations, are met. These exemptions are commonly known as the “white-collar” exemptions. Certain computer professionals and outside sales employees are also included in the exemption and are therefore excluded from the minimum wage and overtime requirements.

Subject to some exceptions, an employee must meet the following three tests to fall within one of the “white-collar” exemptions:

  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 (“salary basis test”);
  2. the amount of salary paid must meet a minimum specified amount (“salary level test”); and
  3. the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).

HCE exemptions. The regulations also contain a special exemption for “highly compensated” employees, or HCEs, who are paid total annual compensation of $100,000 or more (including nondiscretionary bonuses and commission); whose primary duty includes performing office or non-manual work; and who customarily or regularly perform at least one of the duties or responsibilities, as set out in the duties test, of an exempt EAP employee.

Proposed salary thresholds. The salary level for an executive, administrative or professional employee to be exempt has been set since 2004 at the weekly salary of $455, or $23,660, annually. The level of compensation for “highly compensated” employee to be exempt has also been in place since 2004.

The notice of proposed rulemaking proposes increasing both the salary level for an EAP employee and the total annual compensation for HCEs from Jan. 1, 2020.

The proposed changes are as follows:

  • The proposal increases the minimum salary required for an employee to qualify for exemption to $679 per week (equivalent to $35,308 per year) from the currently-enforced level of $455 per week.
  • The proposal increases the total annual compensation requirement for “highly compensated” employees to $147,414 per year from the current level of $100,000.
  • A commitment to periodic review to update the salary threshold. An update would continue to require notice-and-comment rulemaking.
  • Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level.

The Impact on Employers

While managing employees’ overtime can be problematic, the biggest impact of the overtime rule changes for employers will be the effect of the salary level increase on the cost of employing staff.

The standard salary level is not a minimum wage requirement, and no employer is obliged to pay their employees a salary equivalent to the level or above, unless they want those employees to remain exempt from the right to be paid 1.5 times their regular wage for overtime, under one of the “white collar” exemptions.

Other than the avoidance of additional employment costs, the advantage of employees being exempt is that there is no need to record and keep details of hours worked; no need for approval of overtime beyond a 40-hour week; and no need for the payroll system to calculate overtime pay at 1.5 times the regular hourly wage.

For some employers, the appropriate response to the overtime rule change will be to increase the basic salary of some or all employees. However, that is not an option for the majority of employers and will not be appropriate for all of their employees or temporary employees.

Even allowing for nondiscretionary bonuses and incentive payments such as commission to account for $3,530 or 10% of the standard salary level, the increase from the existing standard salary level to the level introduced by the NPRM means an increase in base salary of $11,648 for employees to remain exempt. Increasing salaries may involve lowering the commission element of a remuneration package, which involves a fundamental change to an employee’s contract.

However, there are alternatives to increasing salaries, and these include: adjusting hours and work schedules to avoid overtime; keeping salaries low but paying for overtime hours actually worked; reclassifying some or all of those staff as non-exempt hourly workers; or altering the duties of some staff to fall into one of the exemptions to the standard salary level and/or salary basis tests.

The public will have 60 days to comment on the proposed regulation once the notice of proposed rulemaking is published in the Federal Register. However, it is unlikely the proposals will change significantly as the DOL conducted an extensive consultation in advance of finalizing these proposals through in-person listening sessions and a 2017 Request for Information.

With less than nine months to go before this proposed rule comes into effect, it is important that employers take action now to consider how they will comply and the impact this will have on their business.