In September 2017, the Obama Administration’s attempt to update the overtime regulations of the Fair Labor Standards Act (“FLSA”) by raising the salary level for overtime exemption to $47,476 a year died in the courts. On March 7, 2019, the Department of Labor (“DOL”) issued a proposed rule to raise the salary level to $35,308 a year. The DOL estimates that, based on this increase, 1.1 million currently exempt employees will gain overtime eligibility by 2020. While there is still opportunity for changes to the proposed rule and, undoubtedly, there will be court challenges, employers should pay attention to this potential significant change to overtime eligibility.
The FLSA requires covered employers to pay employees 1.5 times their regular rate of pay for all hours worked in excess of 40 hours per week. While the FLSA states overtime pay is the general rule, there are important exceptions. One of the most commonly utilized overtime exceptions is popularly known as the “white collar” exemption. This exemption applies when three requirements are satisfied: (1) the employee is payed a predetermined and fixed salary (“salary basis test”), (2) the salary paid meets a minimum specified amount (“salary level test”), and (3) the employee’s job duties primarily involve executive, administrative, or professional duties (“duties test”). The salary level test seeks to establish a dividing line between employees who are not likely to serve in jobs satisfying the duties test given their rate of compensation, and employees who likely would serve in an executive, administrative or professional position.
Currently, the salary level test is satisfied when an employee makes a weekly salary level of $455 a week ($23,660 per year). Thus, if an employee makes at least $455 a week, and meets the other requirements of the white collar exemption, that employee would not be entitled to overtime compensation. In 2016, the Department of Labor issued a final rule increasing that rate to $913 a week ($47,476 per year). This rule not only doubled the salary level, but also established automatic increases every three years. The United States District Court for the Eastern District of Texas, however, held this regulation invalid, largely on the basis that the increased salary was so high it would essentially eliminate the duties test as an element of the exemption. This would exclude employees engaged in a bona fide executive, administrative, or professional capacity based on salary alone. Since then, the Department of Labor has been enforcing the salary level test at the 2004 rate of $455 per week.
The current proposed rule seeks to set a salary standard of $679 per week ($35,308 per year). Rather than set an automatic updating period, DOL will propose updates to these levels every four years. The rule also proposes to allow employers to count certain nondiscretionary bonuses and incentive payments to satisfy up to 10% of the salary level test. Finally, the proposed rule raises the total annual compensation requirement for highly compensated employees, who are subject to a minimal duties test, from $100,000 to $147,414. The proposed rule does not put forth any changes to the current duties test.
If adopted, this rule would drastically increase the number of employees eligible for overtime under the FLSA. In turn, this would likely increase employer liability for unpaid overtime. The DOL is currently accepting written comments on the proposed rule, which must be submitted on or before May 21, 2019. If you have questions or concerns regarding overtime pay liability under the FLSA, contact an experienced labor and employment attorney at Mesch Clark Rothschild.
