DOL Poised to Raise Salary Level for Exempt Employees
The Fair Labor Standards Act (“FLSA”) establishes minimum wage, overtime pay, recordkeeping, and child labor standards that affect full-time and part-time workers in the private sector and in federal, state, and local governments. These minimum wage and overtime rules apply generally to all employees unless the individual can be classified as “exempt” from the provisions.
Since 1940, the DOL regulations have generally required each of three tests to be met to qualify for an exemption:
(1) SALARY BASIS TEST: Employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality and quantity of work performed.
(2) SALARY LEVEL TEST: The amount of salary paid must meet a specified minimum amount.
(3) JOB DUTIES TEST: The employee’s job duties must meet the duties defined in the regulations.
For the past fourteen years, the minimum salary level has been $455 a week(or $23,660) annually (exclusive of board, lodging or other facilities). However, on March 7, 2019, the Federal Department of Labor (“DOL”) issued a proposal that would raise the standard salary level to $679 per week (or $35,308 per year).
Many of you will recall that in 2016, we were preparing for a salary level hike to $913 a week; however, on November 22, 2016, at the request of numerous states and business groups suing as plaintiffs, the U.S. District Court for the Eastern District of Texas issued a preliminary injunction blocking the DOL’s new rule. As of November 6, 2017, the Fifth Circuit has held an appeal in abeyance pending further rulemaking regarding a revised salary threshold.
The DOL is currently seeking public comment on the proposed rules; and we will provide updates as more information becomes available. In fact, we anticipate numerous alerts on this issue in coming months as the Washington State Department of Labor and Industries (L&I) is also contemplating raising the salary basis for an exempt employee in Washington to between $56,160 and $70,200. These numbers are significantly higher than those in the proposed federal amendment; and as employers are required to implement whatever rules are most beneficial to the employee, Washington employers would be required to implement the higher Washington salary threshold. This would mean a potential increase to approximately $1,350 per week in salary versus the current requirement of $455 per week.
Understanding that the salary threshold is certain to adjust upwards, it is an appropriate time to think about how your organization will respond. For example, start identifying the exempt employees that might need to be reclassified if the proposed increases discussed above become law. Regarding each affected employee newly entitled to overtime pay, employers may choose to: (a) increase the salary of an employee who meets the duties test to at least the new salary level to retain his or her exempt status; (b) pay an overtime premium of one and a half times the employee’s regular rate of pay for any overtime hours worked; (c) reduce or eliminate overtime hours; (d) reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the workweek, to hold total weekly pay constant; or (e) use some combination of these responses.
In addition, you might use this opportunity to audit all your employee classifications, to make sure those individuals currently identified as exempt meet the job duties test regardless of how much they earn. Keep in mind that the new salary increases will largely affect administrative, professional and executive employees, but will likely not affect the pay provisions for certain licensed professionals (e.g. lawyers or doctors), outside salespeople or certain retail employees. Further, certain workers are not considered employees for purposes of the Act, including bona fide interns, volunteers and independent contractors and are therefore not subject to the protections of the FLSA or MWA. Finally, particular jobs may be completely excluded from coverage under the FLSA overtime rules or are governed by other federal labor laws, in which case the FLSA does not apply.
If you have any questions, please do not hesitate to reach out to us.