The United States Department of Labor (DOL) announced recently that it is proposing a rule to raise the salary threshold required for an employee to be exempt from the Fair Labor Standards Act’s overtime requirements. An overview of the key provisions of the proposed rule, together with some suggestions for how best to prepare for this rule, are set forth below.
- The proposed rule would raise the threshold to $1,059 per week or about $55,000 per year, from its current rate of $684 per week or about $35,568 per year, with automatic updates to this earning threshold every three years.
- The proposed rule would also increase the highly compensated employee total annual compensation requirement to $143,988 per year from its current rate of $107,432 per year, with automatic updates to this earning threshold every three years.
- The proposed rule does not change the duties tests required for an employee to be exempt; employers will still bear the burden of establishing that an employee is exempt by proving that the employee meets both the salary basis test and the duties test.
Once the proposed rule is officially published in the Federal Register, there will be a time for input and comments concerning the proposed changes before the DOL issues a final rule.
Challenges to the proposed rule are anticipated. The Obama administration previously finalized a rule that would have raised the salary threshold in December 2016, but a Texas federal court invalidated that rule, finding that the salary threshold was set so high it made the job duties piece of the exemption test irrelevant and expanded protections to workers Congress sought to exclude.
Despite some uncertainties around whether, and to what extent and when, the DOL’s proposed rule becomes final and sticks, employers should start planning and preparing for the proposed rule to become effective.
At a minimum, employers should confirm whether the compensation for employees currently treated as exempt would satisfy the new thresholds. If not, employers would need to determine whether to increase the compensation for those employees to satisfy the new thresholds, or to reclassify such employees as non-exempt. If an employee’s salary need only be increased slightly to satisfy the new earnings thresholds, it may be an easy decision to simply provide the employee with that salary increase. Likewise, it may be an appropriate decision to reclassify an employee as non-exempt if the employer would have to provide a substantial salary increase to meet a new threshold. That said, these decisions will not only impact labor costs, but also may require employers to reconsider the current structures and how these decisions will affect their fundamental business model.
The proposed rule also presents a good opportunity to audit whether exempt employees are performing the job duties necessary to meet the duties tests for a particular exemption.
Reclassifying employees from exempt to non-exempt almost always comes with the risk that the employees could bring misclassification claims for the historical exemption classification, particularly when there is no change to the employees’ job duties. However, reclassifying employees in response to the DOL’s proposed rule may bolster an employer’s defense to such claims in that the employer can argue that it the employees always met the job duties tests, and were simply reclassified in response to the salary threshold change. Reclassifying employees in response to the DOL’s proposed rule may also land better with the employees being reclassified as compared with an employer reclassifying in the ordinary course without a change to the law. In other words, if an employer has employees who are at risk of not meeting the duties tests, the proposed rule presents a window of opportunity to reclassify them with less risk than might ordinarily exist outside of this window.
Employers who reclassify employees as non-exempt will need to consider updating policies and procedures to ensure that the newly non-exempt employees comply with overtime laws, do not work unauthorized overtime, do not work off the clock, etc.
The wage and hour area at the federal level, as well as state and local levels, remains dynamic and ever subject to refinement and reframing. The proposed DOL rule is another illustration of how dynamic this area is, which requires a great deal of attentiveness and follow through by employers to ensure appropriate compliance with the law and consistency with respect to periodic review of compensation programs. As noted, proposed changes in the law often provide a special opportunity for revisiting a host of wage and hour considerations within the context of an employer’s business model.