United States: Dept. Of Labor Proposes To Increase Minimum Salaries Required To Meet FLSA Exemptions

On March 7, 2019, the U.S. Department of Labor (DOL) published its highly anticipated proposed changes to the salary level requirements of the Fair Labor Standards Act's (FLSA) white-collar exemptions (e.g., professional, administrative, executive, computer professionals and outside sales). The proposed rule would increase the minimum guaranteed weekly salary for those exemptions to $679 per week, or $35,308 per year.

The DOL had previously issued a final rule in 2016 to, among other things, increase the minimum salary level to $913 per week, or $47,476 per year. However, a Texas federal court issued a permanent injunction blocking implementation of the 2016 final rule, and the rule never went into effect.

This proposed rule would formally rescind the 2016 rule and increase the minimum weekly standard salary level for exempt employees, increase the total annual compensation requirement for the “highly compensated employee” test, and revise the special salary levels for employees in the motion picture industry and certain U.S. territories. It also announces the DOL’s intention to propose updates to the earnings thresholds every four years. Importantly, the proposed rule includes no changes to the duties tests for the exemptions.

Significant Proposed Changes

Minimum Guaranteed Salary

The proposed rule would increase the minimum salary from $455 a week to $679 a week ($35,308 per year). This figure represents the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (the calculation used to set the minimum salary in the 2004 final rule, which is currently in effect). The proposal would allow employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test, provided such bonuses are paid at least annually.

Highly Compensated Employee Exemption

The “highly compensated employee” exemption, which enables employers to meet a simpler duties test as long as a higher minimum guaranteed compensation threshold is met, would increase from $100,000 to $147,414 for a full-year worker, which is the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally.

Special Salary Levels

The DOL’s proposed rule would apply a special weekly salary level of $455 to Puerto Rico, the Virgin Islands, Guam and the Northern Mariana Islands. It would apply a separate weekly special salary level of $380 to American Samoa. And it would update the special weekly “base rate” for the motion picture producing industry to $1,036.

Future Updates to the Earnings Thresholds

Federal law mandates that the DOL define and delimit the overtime and minimum wage exemptions “from time to time.” 29 U.S.C. 213(a)(1). The proposed rule states the DOL’s intention to update the salary minimums every four years through the normal rulemaking process. The DOL would utilize the calculation methodologies in the proposal for subsequent updates and then propose the updates with a proper commenting period. In contrast, the 2016 rule had included automatic updates that would have gone into effect without additional rulemaking. 

What This Means for Employers

Wage-and-hour compliance remains an important concern for employers. Noncompliance with the FLSA and its regulations can result in significant liability, along with potentially negative impacts on publicity, morale and recruitment efforts.

The increase in the minimum guaranteed salary will likely have an immediate and significant effect. The DOL recognizes that employers required to reclassify positions to nonexempt status may demand fewer hours of employees in those positions in order to lessen the potential overtime obligation. The DOL perceives this reality as a potential benefit to employees seeking a better work-life balance. Employers, conversely, may struggle to balance department workloads within budgetary constraints.

While the DOL will likely make changes to the proposed regulations before it finalizes them, it is unlikely that any further changes will be substantial. Therefore, employers should anticipate the potential impact and plan accordingly.

The DOL's public comment period will run 60 days from the date of publication in the Federal Register.

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