Raises or reclassifications? Proposed federal rule would increase minimum weekly salary for exempt status to $679 per workweek.
March 15, 2019
By: Keith Kopplin and Bernard “Bud” Bobber
On March 7, 2019, the U.S. Department of Labor (DOL) issued a notice of proposed rulemaking (NPRM) and request for comments regarding the federal Fair Labor Standards Act (FLSA) white collar exemptions. Chief among the proposals is to increase the minimum salary required to be exempt from overtime pay as an executive, administrative, or professional employee from $455 per week ($23,660/year) to a projected $679 per week ($35,308/year). If the proposal becomes final, this would be the first increase to the salary level since 2004.
This is the DOL’s second attempt to increase the minimum salary for exempt status in the past few years. . The last effort, led by President Obama’s Administration in 2016, would have increased the weekly salary threshold to $913 per week, but that was blocked by a federal court. This NPRM expressly rescinds that prior increase and even acknowledges that it was inappropriate. Although the DOL’s recent rulemaking followed requests for information and public listening sessions, it is likely to be challenged too. For now, however, the 60-day clock is ticking for public comments. After the comment period closes, an amended regulation can become law. While the DOL has not committed to an expected effective date, it has stated its desire and intent to have the change become effective before the end of 2019.
Exempt Status Under the FLSA
To be properly classified as exempt from overtime under the most commonly applied FLSA rules, an individual must be primarily engaged in exempt duties, paid on a salary basis, and earn at least the required minimum amount—currently $455 per workweek. Although the FLSA has not proposed changes to the job duties and salary basis associated with exempt status, the proposed rule would significantly increase the minimum required weekly salary, from $455 to $679. This represents an increase of nearly 50 percent.
To be properly paid on a salary basis, an employee must regularly receive a predetermined amount—in excess of the minimum—each pay period, on a weekly or less frequent basis. Although the rules do permit employers to pay exempt employees amounts in addition to their guaranteed salary (for things like working extra shifts)the FLSA generally prohibits deductions from pay that are based on the quality or quantity of the work performed.
100,000 Manufacturing Employees May Need Raises
According to the DOL, approximately 1.1 million exempt employees would be affected by the increased salary threshold, including more than 100,000 who work in manufacturing. Under the DOL’s current proposal, employers have two options for affected exempt employees whose pay falls below the threshold: 1) reclassify these employees as non-exempt and pay overtime pay for hours worked over 40 in a workweek, or 2) increase the salaries to meet or exceed the new proposed threshold. Note that these options present different litigation and liability risks.
Employers who treat employees who could be classified as exempt as non-exempt (and pay them overtime) face no liability moving forward. In other words, choosing not to use an exemption that applies, and instead paying overtime, is perfectly legal. However, current or former employees could file a class or collective action case alleging that this change to non-exempt status supports the argument that the job was previously classified incorrectly as exempt. The potential exposure for these types of lawsuits is often high. On the other hand, reclassifying relatively low-level jobs as exempt is high risk. For years, the court dockets have overflowed with class and collective action lawsuits challenging employers’ use of exemptions where all the required elements allegedly are not met.
The manufacturing positions most directly impacted by the new proposal would be those treated by the employer as exempt, but paid a salary less than $679 per week. In many factories, this might implicate some quality assurance technicians, shipping/receiving clerical personnel, front line supervisors and team leaders, and perhaps human resources or other office personnel. To address this new development, the DOL suggests that employers raise salary levels, reorganize workloads, adjust work schedules, or spread work hours in order avoid payment of overtime if the job is reclassified as non-exempt.
The DOL’s Methodology
The DOL’s proposal would set the salary amount at the 20th percentile of earnings of full-time salaried workers in the retail sector of the lowest-wage census region (currently the South). In January 2020, that amount is projected to be $679 per week. The DOL proposes to increase the threshold for the “highly compensated employee” exemption to the 90th percentile of earnings, which would be an increase from $100,000 to an estimated $147,414 in January 2020. Although the proposal calls for periodic reviews of the salary threshold, it does not provide for automatic increases.
Annual Bonuses May Reduce Impact
The DOL’s proposal would allow employers to count non-discretionary bonus payments for up to 10 percent of the salary amount, provided the payments are made no less frequently than annually. Allowing for such payments to occur annually is an improvement over the 2016 proposal—which only allowed payments made on a quarterly or more frequent basis to be included—and is more consistent with modern pay practices, including those of many manufacturers, who provide incentives, bonuses, and commissions based on annual performance. The proposed rule would not, however, allow non-discretionary bonus payments to count towards the threshold for the highly compensated employee exemption.
Take Advantage of the Opportunity
Legislative or regulatory changes are always a great time to review practices. Current practices be adjusted to account for new developments, and past practices that may fall in the gray area of compliance can often be corrected without drawing excessive attention to the underlying concern. If an employee earning at least $455 per workweek, but less than $679 per workweek, is not primarily engaged in exempt work, for example, the salary increase can help explain a reclassification or redistribution of work.
DOL Promises More to Come
The DOL is also working on proposed rules to update and clarify the definition of the regular rate for purposes of calculating overtime due under the FLSA, and the rules for determining joint employer status. This should come as welcome news for manufacturers who pay bonuses, commissions, and other sums to non-exempt workers, as the new rules may provide much needed clarity as to what can be properly excluded from the overtime pay calculation. Similarly, the joint employer rules should help manufacturers better understand their legal obligations with respect to workers they engage through temporary staffing agencies and other third-party service providers.
Keith Kopplin is a shareholder in the Milwaukee office of Ogletree Deakins and member of the firm’s Manufacturing Industry Group. He focuses his practice on representing employers in employment litigation and other employment law matters. Kopplin regularly assists employers in resolving wage and hour class and collective actions, defending employment discrimination claims, responding to government audits, and improving workplace policies and procedures. He also provides day-to-day counseling to employers regarding a wide range of human resource matters including discipline and discharge decisions, the Wisconsin and federal Family and Medical Leave Acts, wage and hour practices, and workplace accommodations.
Bernard J. (“Bud”) Bobber
Bernard J. (“Bud”) Bobber is a shareholder in the Milwaukee office of Ogletree Deakins and co-chair of the firm’s national Manufacturing Industry Group. Bobber represents employers before federal and state courts and administrative agencies throughout the country in all areas of employment law, with particular focus on wage and hour, trade secrets/noncompete, employee benefits, and employment discrimination matters. He has extensive experience in the defense of class action cases and routinely represents clients in labor arbitrations and in unfair labor practice proceedings before the National Labor Relations Board. Bobber also counsels organized and union-free employers on employment and labor law issues and provides assistance with problem prevention.