By: Jay Mittelman
The U.S. Department of Labor (DOL) recently announced a proposed rule that increases the salary threshold to $35,308 for employees who qualify for the “white collar” exemption under the Fair Labor Standards Act (FLSA). The pending FLSA changes have sparked deja vu among employers, evoking flashbacks of the 2016 final overtime rule.
As an employer, you’re likely anxiously awaiting the fate of the new proposal. While waiting, it’s important to prepare in case the regulations come to fruition.
Here we share preparation strategies as well as background information on the new proposal, requirements of the new rule, and the impact on employers.
The Fair Labor Standards Act addresses minimum wage, labor for minors, overtime, and how payment records are kept. FLSA rules affect both private employees and government workers, with just a few exceptions.
On May 18, 2016, the Obama-era DOL issued a final FLSA overtime rule, which hiked the salary threshold from the current $23,660 per year to $47,476 per year. This increase applied to salaried executive, administrative, and professional employees—“white collar” workers—who qualify for the FLSA’s minimum wage and overtime exemptions. However, the rule faced a series of legal challenges and was ultimately vacated by a federal court.
In 2017, under the Trump administration, the DOL expressed interest in revisiting the overtime rule. Note that in his congressional testimony, then-nominated Secretary of Labor, Alexander Acosta, indicated his support for increasing the number of low-wage employees who are eligible for overtime. Acosta declined to follow the threshold set by the Obama-era DOL, instead suggesting a salary level closer to $33,000.
On March 7, 2019, the DOL announced a new proposed rule that boosts the salary threshold to $35,308 per year. As most analysts predicted, the new proposal hits in between the 2016 exemption and the threshold currently in place. It is being published in the Federal Register, followed by a 60-day comment period.
The DOL then issues final regulations, and that could happen anytime in 2019 or the process could move into next year. The National Law Review reports that the DOL is working toward a deadline before the 2020 presidential election. According to the DOL, over one million U.S. workers would be eligible for overtime under the new regulations.
The new proposed rule:
The proposed new rule makes no changes to the FLSA job duties test (which we summarize below), nor does it require automatic adjustments to the salary threshold.
If the proposed regulations come to pass, salaried executive, administrative, and professional employees who meet the FLSA duties test must receive at least the new minimum salary requirement in order to retain their FLSA exempt status. Salaried employees who receive less than the new minimum salary requirement will be eligible for overtime.
For example, to keep the FLSA administrative exemption, you will need to pay employees who fall in that category at least $35,308 per year. This equals $679 per week. Paying them less than $35,308 per year will render them non-exempt. You will have to pay them overtime for work exceeding 40 hours in a week.
The above example reinforces the fact that “exempt” does not necessarily mean “salaried.”
An employee can be salaried yet non-exempt. Salaried employees are exempt only if they satisfy the FLSA salary basis and job duties tests. Currently, to fulfill the salary basis test, the employee must earn at least $23,660 per year. To satisfy the job duties test, the employee must perform specific duties. These duties are defined by the FLSA. If a salaried employee does not meet the salary basis and job duties tests, then he or she is non-exempt.
The proposed rule applies to all employers with FLSA coverage. However, sectors that traditionally pay lower salaries—such as food and beverage, hospitality, and nonprofits—are likely to be more affected by the changes than others. It might be difficult for employers in those sectors to increase the exempt employees’ salaries; these employees may need to be reclassified.
However, according to an article published by the Society for Human Resource Management (SHRM), employers should hold off on reclassifying employees because “There is a long road ahead before there is a final rule.” The proposal is in the initial stage of what is predicted to be a lengthy process.
All non-exempt employees are eligible for overtime, while exempt employees are not (hence, being exempt from the rule).
The Non-Exempt Worker:
The Exempt Worker:
Your review of all existing exempt employees should cover job descriptions, job duties, and current salaries. The Department of Labor provides a list of the exemption categories, which we utilized to create the Excelforce Employee Classification Checklist. Answer the questions below to make sure your employees are classified properly under the FLSA.
The answer to all of these must be “YES” in order to qualify for the executive employee exemption.
The answer to all of these must be “YES” in order to qualify for the administrative employee exemption.
Learned Professional Employees
The answer to all of these must be “YES” in order to qualify for the learned employee exemption.
Creative Professional Employees
The answers to these must be “YES” in order to qualify for the creative employee exemption.
Computer Professional Employees
1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
2) The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
3) The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
4) A combination of the aforementioned duties, the performance of which requires the same level of skills?
The answer to all of these must be “YES” in order to qualify for the computer employee exemption.
Highly Compensated Employees
The answers to these must be “YES” in order to qualify for the highly compensated employee exemption.
You should now have a clearer assessment of the potentially exempt and non-exempt workers currently under your employment. If not, here are additional resources from the Federal Government.
Employers should also follow these best practices to prepare for the pending FLSA changes:
This remains to be seen, as the rule has not yet been finalized. Once the proposed rule is published in the Federal Register, the public will get 60 days to comment, as previously mentioned. When the rule change was proposed in 2016, the DOL received nearly 270,000 comments in response, so we expect a similar influx of comments this year. In addition, industry experts have cautioned that, similar to its predecessor, the proposed rule could encounter legal challenges.
In the meantime, consider evaluating your exempt employees’ job duties to ensure they align with the respective FLSA definition. This will allow you to rectify any current mistakes relating to FLSA exempt status. Most importantly, stay abreast of new developments and be ready to implement the pending changes if they become mandatory.
Excelforce will monitor the changes and keep you updated on the latest developments. Read more about our comprehensive and customized payroll solutions (including guaranteed compliance for FLSA laws, along with all other federal and state statutes).