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Overtime Exempt Salary Level of $35,508 Proposed

March 14, 2019
Labor Department seeks to avoid legal issues that sidelined Obama-era proposal.

Following years of development, new federal overtime rules were proposed last week by the U.S. Department of Labor (DOL) and are anticipated to go into effect in early 2020.

The new rules would update the salary thresholds used to determine which workers are entitled to overtime compensation after working 40 hours in a week. Under the proposal, the salary level will increase from $455 per week (which amounts to $23,660 annually) to $679 per week ($35,308 annually).

Following a period for DOL to receive additional public comments and possibly make changes, the rules will become final and go into effect. If they do so without any significant changes, the result would represent the first increase to the salary level since 2004. After an Obama-era proposal had been blocked in the courts, the Trump-era DOL took time carefully gathering a new round of comments before issuing its new proposed rules.

The proposal also updates the salary level with projections using current wage data to Jan. 1, 2020. In addition, the rules call for periodic review – not automatic adjustments – to update the salary level, which would still require adherence to the same federal notice-and-comment rulemaking procedures.

Many employees currently classified as exempt from overtime will likely become non-exempt because of the increased salary level test, although it doesn’t go as far as the 2016 Obama-era rule would have. DOL estimates that 1.1 million workers who are currently exempt because they earn more than $455 but less than $679 per week will get overtime pay if the proposed rules go into effect.

The 2016 rule would have impacted 4.2 million workers, a point that is being exploited by anti-Trump critics who press the view that the President is actually taking money out of workers’ pockets, although the previous rules never went into effect.

The new threshold is projected to equal the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (the South) and in the retail sector. DOL also proposes to allow employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level test, provided that the bonuses are paid at least annually.

The department also proposes increasing the salary level required to meet the Fair Labor Standards Act (FLSA) Highly Compensated Employee (HCE) exemption. Under the current standards, covered employees must earn at least $100,000 in total annual compensation, perform office or non-manual work and customarily and regularly perform at least one of the exempt duties of an exempt executive, administrative or professional employee.

Duties Test Unchanged

Once in effect, the HCE salary test will rise to the 90th percentile of full-time salaried workers nationally, or $147,414, when projected to January 2020. Employers should note that many states with state-level FLSA equivalents do not incorporate, and even expressly exclude, the HCE exemption, say attorneys Bryan Stillwagon and Candice S. Thomas of the law firm of Thompson Hine LLP.

The duties test, which also is used to help determine which employees are considered exempt when they perform certain executive, administrative or professional duties, remains unchanged in the proposed regulations.

The Obama-era rules, which were blocked from going into effect by a court injunction, had included automatic annual cost-of-living increases that did not require the same rulemaking procedures. Instead, DOL’s new guidelines propose conducting a review every four years to set updated threshold levels.

“Our economy has more job openings than job seekers and more Americans are joining the labor force,” said Labor Secretary Alexander Acosta, at the March 7 press conference announcing the rules proposal.  “At my confirmation hearings, I committed to an update of the 2004 overtime threshold, and today’s proposal would bring common sense, consistency and higher wages to working Americans.”

DOL pointed out that the proposal maintains overtime protections for police officers, firefighters, paramedics, nurses and laborers including non-management production-line employees and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen and construction workers.

The department also took the opportunity to stress the care it took in developing the new standard. DOL received extensive public input gathered from six in-person listening sessions held at different locations around the country and accepted more than 200,000 written comments as part of a Request for Information (RFI) that it opened in 2017.

“Commenters on the RFI and in-person sessions overwhelmingly agreed that the 2004 levels need to be updated,” observed Keith Sonderling, acting administrator for the DOL Wage and Hour Division.

Attorney Michael Lee of the law firm of Barnes & Thornburg LLP recommends that in the coming months employers should again focus on getting their wage-classification houses in order.

“Most employers did the heavy work two years ago, and can revisit that groundwork: making decisions about adjusting worker pay and titles, and either raising the pay of employees who were just below the higher threshold to just above it or reclassifying salaried workers as hourly employees eligible to earn overtime,” he says.

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