Background
In the final months of President Obama’s Administration, in May 2016, the United States Department of Labor (“DOL”) published its much-anticipated final rule revising the overtime regulations of the Fair Labor Standards Act (“FLSA”). Those regulations focused primarily on updating the salary and compensation levels required for employees to qualify for the Executive, Administrative and Professional exemptions. The salary thresholds were increased from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). Correspondingly, the salary threshold for the Highly Compensated exemption increased from $100,000 to $134,004 per year.
In a series of separate lawsuits filed by 21 states and the United States Chamber of Commerce (which were later consolidated), plaintiffs alleged that the DOL overstepped its authority because the impact of the new salary level test unconstitutionally shifts the primary focus away from the exempt duties test as Congress had originally intended. The plaintiffs sought a preliminary injunction prohibiting enforcement of the DOL’s new overtime regulations prior to their December 1, 2016 effective date.
On November 22, 2016, Judge Mazzant issued a nationwide preliminary injunction temporarily blocking the enforcement of the DOL’s new overtime regulations. Judge Mazzant seemed persuaded by the argument that the new salary level regulations placed too great of an emphasis on the salary level requirement as opposed to the duties test as Congress had intended.
When President Trump took office in January 2017, the DOL ceased efforts to enforce the Obama’s Administration’s rule. In public comments, however, new Trump Labor Secretary Alexander Acosta, repeatedly indicated that he favored some increase in the minimum salary threshold which was last raised in 2004 (and before that, in 1975).
Highlights of the New Overtime Regulations
On March 7, 2019, the DOL announced its new Notice of Proposed Rulemaking designed to change the overtime regulations of the FLSA. The proposed rule change increases the salary level from $455 per week ($23,660 annually) to $679 per week ($35,308 annually).
According to the DOL, the 2016 Obama Administration’s proposed rule change would have made approximately 4 million additional workers eligible for overtime. However, under the Trump Administration’s more modest approach, the DOL estimates that an additional 1 million American workers will now be eligible for overtime. Interestingly, however, under the Trump Administration’s new Proposed Rule, the salary threshold for highly-compensated employees increases from $100,000 to $147,414, which is approximately $13,000 more than the Obama Administration’s proposal.
The new Proposed Rule also allows employers to use nondiscretionary bonuses and incentive payments (including commissions) that are at a minimum paid annually to satisfy up to 10% of the standard salary level for the exempt employees. Additionally, it adds a provision that allows employers to make a final “catch-up payment” within one (1) pay period after the end of each 52-week period to bring an employee’s compensation up to the required level, if certain conditions are satisfied.
The new Proposed Rule does not set predetermined adjustment amounts for future salary level adjustments. It also does not include changes to the corresponding duties test for exempt employees. Finally, the new Proposed Rule officially rescinds the Obama Administration’s 2016 Proposed Rule.
The DOL’s Notice and Comment Period
In developing the proposed rule change, the DOL received extensive public input from six in-person listening sessions hosted around the nation that attracted more than 200,000 comments. The overwhelming consensus of those who provided comments was that the currently enforced salary and compensation levels needed to be updated.
The DOL is currently seeking public comments which can be submitted electronically at www.regulations.gov in the rulemaking docket RIN 1235-AA20. Again, the DOL also intends to propose updates to the salary and compensation levels every four years, with final changes requiring notice-and-comment rulemaking. This is a departure from the proposal of the Obama Administration, which proposed automatically increasing the salary threshold every three years
Implication for Employers
As noted above, the DOL estimates that its overtime changes will impact over 1 million workers, who will now be classified as non-exempt employees and eligible for overtime. Employers should be aware of certain considerations when converting formally exempt employees to non-exempt status. First, many formerly exempt employees who traditionally worked more than 40 hours per week may feel that they are still expected to accomplish the same amount of work and attempt to do so by working over 40 hours per week, but not report the hours. Should these employees later become at odds with their employer, the employee may claim that the employer knowingly allowed them to work over 40 hours per week without compensation and seek compensation for such time, as well as liquidated damages and attorneys’ fees. To combat this potential liability, employers should train newly converted non-exempt employees on the new expectations of their job as they relate to hours worked. Employers should establish policies prohibiting employees from working beyond 40 hours without supervisory approval, and make sure these policies are adequately communicated to the newly converted non-exempt employees.
Additionally, employers may try and minimize the potential loss of prestige some employees may feel in being converted from an exempt employee to a non-exempt employee by continuing to pay these employees a set salary for 40 hours of work per week (an acceptable payment method for non-exempt employees). However, employers choosing to do this should realize that even though they are paying these employees a set salary, they should still track and keep records of the actual hours worked for these employees as these employees are still entitled to overtime pay for all hours worked in excess of 40 per week.
Conclusion
With the release of the DOL’s new FLSA regulations, we again urge employers to assess exempt status classifications, independent contractor classifications, and pay practices through a comprehensive FLSA audit. Additionally, we recommend that employers reiterate and retrain its existing non-exempt employees as well as their newly reclassified non-exempt employees on the employers’ policies and expectations for tracking hours worked and overtime.
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