Following two years of anticipation, after a similar but more aggressive rule was proposed by President Obama’s administration and then squashed by federal courts in Texas, the Department of Labor (DOL) has issued the long-awaited Notice of Proposed Rulemaking that, if enacted, would expand access to overtime pay for certain employees under the Fair Labor Standards Act (FLSA). DOL estimates that this change could expand overtime eligibility for over one million American workers, about 3.7 million fewer than would have been impacted under the Obama proposal. The proposed rule is available here.
Impact of Obama-Era Proposal
Under the rule currently in effect, certain white-collar workers are exempt from the FLSA’s overtime pay requirements if they are paid a salary of at least $455 per week (annualized to $23,660) and perform certain specified duties. This minimum salary threshold was last increased in 2004. The Obama-era rule would have more than doubled the minimum salary to $970 per week (annualized to $47,476), with a mechanism for automatic adjustments every three years to keep up with inflation.
While DOL estimated that the Obama proposal would expand overtime protections to nearly 4.2 million then-exempt employees, critics argued that the higher salary threshold would increase business costs, drive up the use of part-time entry-level workers and independent contractors, and ultimately reduce opportunities for employees reclassified as non-exempt. A group of 21 states and over 50 business groups filed a lawsuit in federal district court seeking to enjoin the rule. The U.S. District Court for the Eastern District of Texas issued a preliminary nationwide injunction just one week before the rule was set to take effect in November 2016. In August 2017, the district court invalidated the rule, holding that DOL exceeded its statutory authority by increasing the salary threshold to a level that had the effect of eviscerating the duties test.
Under the new Trump Administration, DOL adopted a different approach to defending the lawsuit. DOL now agreed with the plaintiffs that the Obama-era increase was too high, but it nevertheless continued to defend the agency’s authority to set the minimum salary threshold. In October 2017, DOL appealed the district court’s decision to the Fifth Circuit, but asked the appeals court to hold the appeal in abeyance while DOL undertook further rulemaking to determine the appropriate salary level. The new proposed rule announced March 7, 2019, is the culmination of that process.
The New Proposal
The new proposed rule would increase the minimum salary threshold to $679 per week, or $35,308 annually. It also would permit employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary threshold, provided that such bonuses are paid annually or more frequently. A nearly identical provision was included in the Obama-era rule. Although some employers may find the new proposal’s $35,308 salary threshold more palatable than the higher threshold in the Obama-era proposal, the new rule may face criticism because, like the Obama rule, it fails to account for industry-specific or regional differences in market salaries.
The new proposed rule would also change the Highly Compensated Employee (HCE) test. The HCE test allows employers to apply overtime exemptions to employees under a reduced duties requirement if the employee meets a higher compensation threshold. The proposed rule would increase the HCE compensation level to $147,414 from $100,000, equivalent to the 90th percentile of full-time salaried workers nationally. The Obama proposal included a more modest increase to $134,004.
As with the Obama rule, the new proposed rule does not change the “duties test,” meaning that there will be no change to which workers qualify as “white collar” based on the job duties they perform.
One unique feature of the new proposed rule is a requirement that salary levels be updated every four years through the regular notice-and-comment rulemaking process. This contrasts with the automatic updates in the Obama-era proposal, which drew criticism for being too rigid in not allowing more discretion from DOL or input from the public.
The new proposed rule does not take effect immediately. The public will have 60 days to comment from the date the proposed rule is published in the Federal Register. A final rule will be published after the comment period has ended.
Employers should keep in mind that some states, such as California, continue to have stricter requirements and salary thresholds for overtime exemption than under the federal FLSA.