Department of Labor Issues New Overtime Rules Which Modify Certain Exemptions
Monday, September 30, 2019
Posted by: Alyce Ryan
The Small Business Legislative Council Alert - DOL Issues New Overtime Rules
Septembe 2019 - The Department of Labor (DOL) issued its highly anticipated final rule modifying the exemptions to the Fair Labor Standards Act (FLSA) overtime rules for certain white collar employees (executive, administrative, professional, and computing positions) and highly compensated employees.
As discussed in prior alerts, these new regulations have been a long time in the making. Many readers may remember that the Obama Administration first attempted to issue new rules, only to have them blocked by a federal court injunction on the eve of their effective date. Rather than continuing the legal fight in support of the Obama Administration’s rules, the DOL under the Trump Administration decided to walk away from those rules and instead began the rulemaking process anew – which ultimately led to this latest set of final rules.
The final rule, which goes into effect on January 1, 2020, increases the minimum salary that employees must be paid to qualify for the white collar or highly compensated exemptions. However, as described further below, these increases are significantly smaller than those that were enacted, but never went into effect, under the Obama Administration. The new rules also do not make any changes to the duties tests associated with the exemptions.
In May, the SBLC submitted comments on the DOL’s proposed version of the rule. The SBLC did not oppose the proposed increase to the white collar salary threshold but did (successfully) push back on the new threshold for the highly compensated exemption and advocate for additional changes that would make the rule better for small businesses. The DOL made multiple references to SBLC’s comments when describing the feedback it received and while the DOL did not heed all of the SBLC’s comments it did address some.
The key regulatory changes embodied in the final rules are as follows:
- On January 1, 2020, the salary threshold for the white collar exemption will increase approximately 50% from the current $455 per week (or $23,660 annually) to $684 per week (or $35,568 annually).
This increase is consistent with the proposed rule and is considerably less than the $913 per week (or $47,476 annually) that was part of the Obama-era rules. The fact that the proposed increase was much more moderate than that contained in the Obama-era rule was the primary reason that the SBLC membership agreed that the SBLC should not oppose the increase. The preexisting $455 per week threshold was set in 2004 and, simply in light of the inflation that has occurred over the last fifteen years, it is hard to argue that it is not outdated. As such, the SBLC, and a large number of other business focused groups, made the prudent decision to support the DOL’s efforts to make a manageable increase to the threshold now instead of putting the changes off to a future Administration that might look to increase the thresholds more dramatically. Though, of course, there is nothing to prevent future changes, the fact the thresholds have now been updated since 2004 will relieve much of the pressure that has been building surrounding the need to increase the thresholds and will make any further changes to the rules a lower priority for any new Administration in the near future. Had this Administration let the rules lie with the 2004 rates – particularly if a Democrat takes the White House in 2020 or 2024, updating the thresholds would have been a top priority.
The DOL calculated the new salary threshold based on the 20th percentile of weekly earnings for full-time salaried workers in the lowest paid Census Region (currently the South) as calculated by Bureau of Labor Statistics (BLS). Thus, although the $684 per week was calculated based on the average salaries in the South, the thresholds will apply to the whole country. This is the same mythology that the Obama-era rules used, however, those rules used the 40th percentile rather than the 20th.
- On January 1, 2020, the salary threshold for the highly compensated will increase from $100,000 annually to $107,432 annually.
This increase is significantly lower than that proposed by the DOL in March. Under the proposed rule, the threshold would have been increased to $147,414 (the 90th percentile of weekly earnings nationally). Based on the comments that it received, including strong opposition from the SBLC, in the final rules the DOL decided the lower the threshold to the 80th percentile of weekly earnings nationally, thus arriving at the $107,432 annual rate.
- The salary thresholds for the white collar and highly compensated exemptions will not be subject to automatic increases.
The Obama-era rules marked the first time that the regulations included a system for automatically increasing the salary thresholds. In the new final rule the DOL has abandoned this concept and instead simply committed to more regularly updating the salary thresholds through the notice and comment process. The SBLC has consistently opposed automatic increases to the salary thresholds. In doing so the SBLC has emphasized that imposing such increases is likely to create a lack of certainty and stability for small employers who are typically less able to absorb frequent new costs and workforce changes.
- Under the new rule, employers will be permitted to count non-discretionary bonuses and incentive compensation (including commission) towards up to 10% of the white collar salary threshold as long as the payments are made at least annually.
Under the preexisting rules, employers were not permitted to include any types of bonuses or incentive compensation in calculating whether an employee’s compensation meets the white collar salary threshold.
The Obama-era rules introduced the notion of allowing employers to satisfy a portion of the white collar salary threshold through non-discretionary bonuses or incentive compensation. The only difference between the Obama-era rules and the new final rules is that, while the Obama rules required that these payments be made at least quarterly to qualify, the new rules only require payment of the bonuses or incentive compensation on an annual basis.
In short, under the new rules employers can satisfy up to 10% of the new white collar salary threshold (i.e. $3,556.80 per year) through the at least annual payment of non-discretionary bonuses or incentive compensation. The SBLC urged the DOL to increase the amount of bonuses or incentive compensation that may be included above 10% but the DOL declined to do so in its final rule, sticking instead with its original proposal. To account for the fact that an employer may not be able to calculate in advance what an employee’s non-discretionary bonus or incentive compensation will be, the new rule also allows employers to make catch-up payments to bring employee’s up to the salary threshold as long as the catch-up payments are made within one week of the last pay period of the end of the year. Such a catch up payment will be credited towards the prior year and will not count towards the threshold for the year in which it is paid.
Prior to the new rules, employers were permitted to include certain types of bonus and incentive payments for the purposes of the highly compensated salary threshold and the new rules do not make any changes to how bonuses and incentive compensation are treated for the purposes of the highly compensated exemption.
- The new rule will make no changes to the duties tests for the white collar or highly compensated exemptions.
As with the Obama-era rules, the DOL did not propose or make any changes to the duties tests, which, together with the salary threshold, apply to qualify an employee for the white collar or highly compensated exemptions. Both during the Obama-era rulemaking process and the most recent round of rulemaking, the SBLC advocated strongly for keeping the existing duties tests on the basis that employers have finally gotten a handle on the duties tests and precedent and guidance has been developed around the existing duties test to help employers navigate them. The SBLC emphasized that starting back at square one with a new set of duties tests would be an undue burden for businesses, particularly small businesses that might not ample resources to hire experts to help them parse the new rules in the absence of developed guidance and legal precedent.
Bringing together the preexisting rules with the new rules going forward:
- To be exempt under a white collar exemption, an employee’s primary duties must be executive, administrative, professional, computing, or outside sales (as defined by regulation) and the employee must be paid a salary of at least $684 a week. Employees in computer-related positions can either be paid a salary of at least $684 a week or on an hourly basis at a rate of no less than $27.63 (unchanged by the final rule).
- To be exempt as a highly compensated employee, the employee must regularly and customarily perform one or more of the duties of an executive, administrative or professional employee (as defined by regulations) and the employee must earn at least $107,432, which includes at least $684 per week on a salary basis.
- Although outside sales employees are generally included in the definition of white collar employees, they are not subject to the same salary thresholds as other white collar employees so, because the new regulations do not impact the duties test, the exemption for outside sales employees is unchanged by these regulations.
Because the Obama-era rules were just a week shy of their effective date when the injunction was issued, many businesses already took action in 2016 to increase employee salaries and review exemptions in preparation for the rules that never went into effect. Nonetheless, although it is not as disruptive as it could have been, these new rule will have a significant impact on many businesses. Businesses that have employees who were previously classified as exempt but who do not earn enough to meet the new salary thresholds will have to decide whether to reclassify these employees as non-exempt (in which case they will be eligible for overtime) or to increase their compensation to meet the new thresholds.
From a financial standpoint, this will largely require businesses to make an employee-by-employee assessment of the amount of overtime that a particular employee works versus the amount that the employee’s salary would need to be increased to meet the new threshold. Businesses can, of course, place strict limitations on the amount of overtime it will allow a newly non-exempt employee to work in order to avoid increased payroll costs. However, this will need to be balanced with productivity concerns, particularly where the employee has traditionally worked significantly more than forty hours per week. For employers who do end up reclassifying employees as nonexempt, they will also have to start tracking hours in order to calculate when and how much overtime is due.
While the new rules do not make any changes to the duties test, businesses that are evaluating employee exemptions will also want to make sure that all employees that they are classifying as exempt meet both the preexisting duties test AND the new salary thresholds.
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