On March 7, 2019 the Department of Labor announced a proposed rule that would make more than a million more American workers eligible for overtime. While the proposed rule has a lot of moving parts and nothing is finalized yet, here is some information for those handling payroll will need to know for the future.
This long-awaited proposed rule will increase the minimum salary threshold to qualify for exemption from the overtime provisions of the Fair Labor Standards Act (“FLSA”) from their current level of $455 per week ($23,660 annually) to $679 per week ($35,308 annually). If finalized, the new overtime rule would result in the reclassification by employers of more than a million currently exempt workers as nonexempt and an increase in pay for others above the new threshold. The proposal does not call for automatic adjustments to the salary threshold. But instead the proposed rule would raise the threshold for “highly-compensated employees” from $100,000 annually to $147,414 per year. This rule will be subject to a period of public comment and is anticipated to take effect in January 2020.
In developing the proposal, the Department received extensive public input from six in-person listening sessions held around the nation and more than 200,000 comments that were received as part of a 2017 Request for Information (RFI). The USDOL arrived at the $679 per week amount by utilizing the same methodology used in setting the threshold in 2004 —by aligning it to the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region and in the retail sector. According to Shepard Mullin’s blog, “The Department believes that the proposed standard salary level would help employers identify a large group of employees who perform nonexempt duties, would aid in identifying bona fide [executive, administrative and professional] employees, and would address the legal concerns that led to the invalidation of the salary level set in the 2016 final rule.”
The proposed rule includes a number of other changes of which employers and payroll managers should be aware of:
- Employers will be permitted to calculate certain non-discretionary bonuses —such as those tied to productivity and profitability— and incentive payments like commissions that are paid annually or more frequently. The reason for this provision is the USDOL’s recognition that traditionally exempt employees may derive a significant portion of their annual compensation from sources other than base salary.
- The proposed rule would permit employers to make a final “catch-up” payment within one pay period after the end of each 52-week period to bring an employee’s compensation up to the required level. According to Shepard Mullins, “the rule would allow an employer to pay an employee 90% of the salary level ($611.10 per week) and, if at the end of the 52-week period the salary paid plus the non-discretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 52 weeks ($35,308), the employer would have one pay period to make up for the shortfall (up to 10 percent of the standard salary level, or $3,530.80).”
- The proposed rule also contemplates special salary thresholds being applied in Puerto Rico, the Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa. These changes are based on the current economic climate in each of those jurisdictions.
- For those in the motion picture producing industry, the proposed rule would provide a special weekly “base rate” for employers of $1,036 per week. This exception has been in place since 1953 to address circumstances where an employee works less than a full workweek and is paid a daily base rate that would yield the weekly base rate if six days were worked.
Here is a summary of the Notice of Proposed Rulemaking Update for overtime for your reference.
- The proposal increases the minimum salary required for an employee to qualify for exemption from the currently-enforced level of $455 to $679 per week (equivalent to $35,308 per year).
- The proposal increases the total annual compensation requirement for “highly compensated employees” (HCE) from the currently-enforced level of $100,000 to $147,414 per year.
- A commitment to periodic review to update the salary threshold. An update would continue to require notice-and-comment rulemaking.
- Allowing employers to use non-discretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.
- No changes in overtime protections for:
- Police Officers
- Fire Fighters
- Laborers including: non-management production-line employees
- Non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, and other construction workers
- No changes to the job duties test.
- No automatic adjustments to the salary threshold.
If you still have questions and are not sure how to properly classify an employee, please contact us immediately! Our staff members are happy to assist, routinely going above and beyond for our client partners. Call 855.565.VSHR (8747) or email us at firstname.lastname@example.org.