On March 7, 2019, the U.S. Department of Labor released its highly anticipated proposed rule to update the Fair Labor Standards Act’s overtime exemptions for executive, administrative, professional, and computer employees, and to replace a currently enjoined rule that was finalized in 2016. If adopted, the proposed rule would raise the salary threshold required for workers to qualify for each of the so-called white-collar exemptions to $35,308 per year ($679 per week), up from the $23,660 that was last updated in 2004, but lower than the Obama administration’s cutoff of $47,476 proposed in 2016. The DOL did not include any provision that allows for the salary level to automatically increase after a defined period of time, as the Obama administration’s 2016 proposed rule did. Instead, the DOL’s proposed rule seeks public comments on a plan to increase the salary threshold every four years going forward, with each increase to be preceded by a period of public comments.
To determine the proposed salary threshold, the DOL used the same methodology that was used in 2004, tying a $35,308 salary level to the 20th percentile of full-time worker earnings in the South, and in the retail sector. This methodology is different than the methodology used by the Obama administration in 2016. In following this 2004 methodology, which was not legally challenged, the DOL may have been seeking a methodology that would be less prone to legal challenge.
The proposed rule also raised the threshold for “highly compensated workers,” who face more lenient requirements for being exempt from overtime, from $100,000 to $147,414 — nearly a $50,000 jump from the 2004 rule and approximately a $13,000 increase over the amount proposed in 2016 by the Obama administration. The DOL determined this significant increase by using the same methodology used by the Obama administration in 2016, setting it at the 90th percentile of all full-time salaried workers nationally.
Another provision in the proposed rule allows employers to consider certain non-discretionary bonuses and incentive payments like commissions, and count them toward up to 10% of a worker’s salary for purposes of reaching a salary exemption.
The DOL anticipates issuing a final rule around January 2020, leaving the opportunity for anticipated challenges and potential revisions to the proposed rule.
The proposed rule made no changes to any of the duties tests under the white-collar exemptions, and also did not include the other potential changes the DOL had previously identified for consideration, including whether it would be appropriate to have different salary levels for each of the white-collar categories, or for each geographic region, to account for cost-of-living differences. Each of these potential changes would have been controversial. It is anticipated that the increase in the salary exemption will make more than a million additional workers overtime-eligible, which is substantially more modest than the 2016 rule proposed by the Obama administration, which estimated at the time that it would make approximately 4 million additional workers eligible for overtime pay.
Notably, several states and local jurisdictions (including California, New York, and in particular New York City and surrounding counties), require higher thresholds to satisfy the overtime exemption under state or local law.
Please consult an attorney in Goodwin’s Employment practice for guidance.