Department of Labor Issues Replacement Rule for FLSA Overtime Exemptions
The United States Department of Labor (DOL) recently issued proposed new regulations that would increase the minimum salary level requirements under the Fair Labor Standards Act (FLSA) for the executive, administrative and professional (“white collar”) overtime exemptions, as well as the highly compensated employee (“HCE”) overtime exemption. The proposed new regulations replace the Obama administration’s controversial 2016 salary level increases that were found invalid by a federal court.
While the proposed new regulations would require employers to pay higher salaries to meet the white collar and HCE overtime exemptions under federal law, their effect in New York State (“New York” or “State”) will be limited compared to many other parts of the country. The proposed higher salary level will have no impact on executive and administrative employees in New York because the State salary level for those employees already exceeds the newly proposed increased federal levels. The proposed salary increases will, however, affect professional employees in New York, as the State does not have a minimum salary level for professional employees. As a result, New York employers will have to comply with any increased federal salary level for professional employees to maintain their overtime exempt status. New York employers will also have to comply with the increased federal salary level for HCEs to maintain their federal overtime exemption. (New York employers should note that the State does not officially recognize the HCE exemption and the New York State Department of Labor has not indicated its position on the exemption.)
What Are the Major Changes?
The proposed new regulations make several significant changes to the current white collar and HCE exemptions under the FLSA. Specifically:
- The current salary level test for the white collar exemptions will be increased from $455 per workweek to $679 per workweek;
- The HCE compensation threshold will be increased from $100,000 per year to $147,414 per year;
- Employers will be able to count nondiscretionary bonuses and incentive payments, including commissions, in satisfying up to 10 percent of the salary level test for white collar exemptions, provided these payments are made at least annually; and
- Both the white collar salary level test and the HCE compensation threshold would be updated, subject to notice-and-comment rulemaking, every four years.
Salary Level Test
In order to qualify for the FLSA’s white collar exemptions, an employee must, among other things, meet the salary basis and salary level requirements.
Currently, the minimum salary level required to meet one of the FLSA’s white collar exemptions is $455 per workweek ($23,660 annually). (In New York, it is currently between $832 and $1,125 per workweek ($43,264 and $58,500 annually), depending on the employer’s size and location). The 2016 rule attempted to increase that number to $913 per workweek ($47,476 annually). Under the proposed new regulations, however, the federal minimum salary level will only rise to $679 per workweek ($35,308 annually). The DOL has indicated that this new minimum salary level was calculated by applying the same method used to set the current salary level in 2004, i.e., by looking at the 20th percentile for earnings of full-time salaried workers in the lowest-wage U.S. Census region (then and now, the South), and/or in the retail sector nationwide.
HCE Compensation Threshold
The DOL has also amended the HCE exemption. Under the HCE exemption, an employer may classify an employee as exempt, so long as he or she (1) meets the white collar salary basis and salary level tests, (2) meets the HCE compensation threshold, and (3) meets a relaxed duties test.
Currently, the HCE compensation threshold is $100,000 per year. While the 2016 rule attempted to increase the HCE compensation threshold to $134,000 per year, under the proposed new regulations, this number will actually increase to $147,414 per year. The DOL has indicated that this new HCE compensation threshold was set using the same method as the Obama administration in 2016, i.e., the 90th percentile of earnings of full-time salaried workers nationally.
Nondiscretionary Bonuses and Incentive Payments
In connection with the increase to the salary level test, the proposed new regulations authorize employers to count nondiscretionary bonuses and incentive payments, including commissions, in meeting the minimum salary requirements. Currently, this process is only available for meeting the HCE compensation threshold.
Under the proposed new regulations, these nondiscretionary bonuses and incentive payments may only be counted to satisfy up to 10 percent of the minimum salary level (i.e., a maximum of $67.90 per workweek, or $3,530.80 annually), provided these payments are made at least annually. While the 2016 rule similarly provided for the counting of nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the minimum salary level, the rule required that such bonuses or incentive payments be paid at least every quarter.
Under the proposed new regulations, if an employer elects to count these bonuses or payments in meeting the minimum salary requirements, and its employee has not received the required minimum salary at the end of the year, the employer is permitted to make a “catch-up” payment. In order to be considered timely, this catch-up payment must be made within one pay period of the end of the 52-week period. The DOL has also indicated that any such catch-up payment will count only toward the prior year’s salary level and not the salary level in the year in which it is paid.
Finally, the proposed new regulations provide that the white collar salary level test and the HCE compensation threshold should be updated, periodically, subject to notice-and-comment rulemaking.
Although the 2016 rule attempted to create a mechanism to automatically update the salary level and HCE compensation threshold every three years, this updating mechanism was found to be unlawful. See Nevada v. U.S. Dep’t of Labor, 275 F. Supp. 3d 795, 808 (E.D. Tex. 2017) (“Having determined the  Rule is unlawful…the Court similarly determines the automatic updating mechanism is unlawful.”).
In an attempt to balance the need to update the salary level and HCE compensation threshold on a regular basis with the need for flexibility to consider unique economic circumstances, the proposed new regulations provide that the DOL will commit to evaluating these earning requirements more frequently. Specifically, the DOL has indicated that the white collar salary level and HCE compensation threshold should be updated, through notice-and-comment rulemaking, every four years. According to the DOL, this proposed compromise would ensure public input on how these earning requirements could stay up to date, while giving employers adequate time to adjust to smaller and more frequent increases.
What Should Employers Do Now?
Before becoming final, the proposed new regulations are subject to a 60-day notice and public comment period. After considering any comments, the DOL will issue a Final Rule, which may or may not differ from the proposed new regulations. If the proposed new regulations are finalized as they stand, the DOL estimates that approximately 1.3 million currently exempt employees would no longer qualify as exempt, absent some intervening action by their employers (e.g., raising salaries to comply with the new white collar salary level and/or HCE compensation threshold).
Employers should review all categories of employees that may be affected by the proposed new regulations, if finalized, and take whatever steps are necessary to remain in compliance with the FLSA’s overtime requirements, including (1) raising employees’ salaries to comply with the new white collar salary level test and/or HCE compensation threshold or (2) reclassifying employees as nonexempt.
What about New York State?
Finally, New York employers should remember that New York State has its own minimum salary level for the executive and administrative exemptions. (Again, New York does not have a minimum salary level for professional employees.) As we reported in a previous Client Alert, the New York State Department of Labor has set the minimum exempt salary level for executive and administrative employees to increase annually with the minimum wage. These minimum salary levels are as follows:
New York City Large Employers (11 or more employees):
- $1,125.00 per week on and after 12/31/18
New York City Small Employers (10 or fewer employees):
- $1,012.50 per week on and after 12/31/18
- $1,125.00 per week on and after 12/31/19
Remainder of Downstate (Nassau, Suffolk and Westchester Counties):
- $900.00 per week on and after 12/31/18
- $975.00 per week on and after 12/31/19
- $1,050.00 per week on and after 12/31/20
- $1,125.00 per week on and after 12/31/21
Remainder of the State:
- $832.00 per week on and after 12/31/18
- $885.00 per week on and after 12/31/19
- $937.50 per week on and after 12/31/20
Should you have any questions regarding the minimum wage and overtime exempt salary requirements, or any other labor and employment matter, please contact any of the attorneys on our Labor & Employment Practice Team.