Labor Department’s Proposed Rulemaking Increasing Salary-Level Test

If reading this article gives you flashbacks to a chaotic time in 2016, do not despair for you are not alone.

Human resources professionals may remember the painstaking work they took to bring their companies into compliance with proposed Department of Labor regulations relating to doubling the salary-level test for employees to be exempt from overtime premium pay, only for a court to moot that work when it barred the DOL from enforcing the regulations.

The DOL recently proposed an increase to the salary-level test that will become effective in January 2020.

Under the Fair Labor Standards Act, all employees must be paid a premium rate of time-and-a-half for all hours worked over 40 hours in a workweek, unless the employee is exempt from the FLSA’s overtime requirements. A widely known, but often misunderstood, three-prong test governs whether an employee is exempt. An employee must satisfy all three tests to be exempt from overtime premium pay:

  • salary basis test (a fixed and predetermined salary that does not fluctuate);
  • salary-level test (a minimum specified weekly amount); and
  • duties test (the employee’s job responsibilities must primarily involve “white collar” executive, professional, or administrative duties).

Since 2004, the salary-level test has been $455 per week ($23,660 annually). In 2015, the Obama administration’s DOL proposed essentially doubling the salary-level test to $913 per week ($47,476 annually). The proposed regulations stood to impact millions of employees who earned more than the 2004 level test but less than the proposed regulations and would become eligible for overtime premium pay once the new regulations took effect.

As companies scrambled to comply, a federal court enjoined the enforcement of the DOL’s new regulations within weeks of its effective date. With the November 2016 election of Donald Trump, the federal government accepted the court’s injunction, and companies could breathe easy — for at least the time being.

This past March, the DOL issued a Notice of Proposed Rulemaking, notifying stakeholders that it intended to increase the salary-level test to $679 per week ($35,308 annually). While this increase to the salary-level test appears modest compared to the previous proposal, the DOL nonetheless projects that the increase will make more than 1 million employees eligible for overtime premium pay who are currently exempt.

The DOL anticipates publishing final regulations before the end of the year, with the regulations taking effect in January 2020. As a result, now is the time for HR professionals to begin analyzing how the regulations will impact their operations and take remedial steps to ensure compliance with FLSA regulations.

The proposed regulations also affect some high wage earners, as the DOL is raising the salary-level test for “highly compensated employees” from $100,000 to $147,414 annually. Under this exemption to overtime premium pay, employees who make above a certain salary threshold have a relaxed duties test, under the belief that the duties of employees who make above this amount need not be subject to the same scrutiny as the duties of those employees making less.

Finally, the DOL committed to periodically reviewing and updating the salary level threshold moving forward. The 2015 proposed regulations, in contrast, would have mandated automatic increases that were indexed to cost of living increases.

With the updated salary-level test scheduled to take effect in a matter of months, now is the time for companies to begin analyzing their workforces to determine the impact of the new regulations. Specifically, HR pros must reassess those employees they classify as exempt who earn between the 2004 salary-level test and what it will be in January 2020.

For those employees, HR will either need to increase their salaries to satisfy the new salary-level test or begin paying them premium pay for all overtime hours worked in a workweek. Likewise, HR should review the job duties of all exempt employees earning between $100,000 and $147,414 annually to ensure that they meet the complete duties test, rather than a relaxed one for highly compensated employees. Otherwise, these employees may also no longer be eligible for exempt classification, absent a raise above $147,414.

The silver lining for many companies is that the hard work was already done in 2016. Let’s just hope you kept your notes and work product.

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