Preparing for the DOL's White Collar Exemption Salary Level Increases

James B. Yates and Sarah E. Pawlicki

Cash in Hand   The Department of Labor's regulations increasing salary levels for employees exempt from the Fair Labor Standards Act's overtime provisions were effective January 1, 2020. The salary level increased to $684 per week (which equates to an annual salary of $35,568) from the previously enforced salary level of $455 per week (which equates to an annual salary of $23,660). The increase is significantly less than the Department of Labor's 2016 attempt to increase the salary level to $913 per week ($47,476 annually). That rule was invalidated by a federal court and prompted the current administration to revise the rule. The Department of Labor's new rule formally rescinds the 2016 rule.

   Employers need to remember that, in order to qualify for an exemption to the Fair Labor Standards Act's overtime requirements, in addition to meeting the increased salary level, an employee must be paid on a salary basis (a predetermined and fixed amount not subject to reductions based on the quality or quantity of the work performed) and the employee must satisfy the duties tests for the administrative, executive or professional exemption (referred to as "white collar" exemptions). To reiterate, paying an employee on a salary basis in excess of the new salary level does not establish an exemption without the employer being able to demonstrate that the employee meets all of the required duties tests of the specific exemption claimed. The only exception to meeting all of the duties tests for a particular exemption is that a highly compensated employee (HCE) need only meet one of the duties tests of any of the white collar exemptions to be classified as an exempt employee. As of January 1, 2020, a HCE is an employee who is paid a salary of at least $107,432 (the currently enforced HCE salary level is $100,000).

   The final rule does not change the duties tests, does not change the salary basis test and does not address compensable "after hours" compensation. The rule also does not provide for automatic increases to the salary level which, along with more than doubling the salary level,
formed the basis of many employer objections to the 2016 rule. Instead, the Department of Labor committed to updating the salary level "more regularly in the future" (the last update was 2004). Furthermore, employers may count nondiscretionary bonuses and incentive payments (including commissions) toward the salary level - but only up to 10% (or $3,556.80). If an employee does not earn enough in a nondiscretionary bonus or incentive payments (to be paid on an annual or more frequent basis), the new rule permits an employer to make a "catch-up" payment to satisfy the salary level for the preceding year.

   For most employers, the current rule will be significantly less impactful to employers than the invalidated 2016 rule, as far fewer employees currently classified as exempt will fall under the new $35,568 salary threshold compared to the $47,476 salary level contained in the 2016 rule. However, employers still need to review salary levels for all exempt employees to ensure compliance with the new salary level. For employees with salaries lower than the new salary level, employers will need to implement strategies to maintain the exemptions or reclassify employees as non-exempt and consider workplace ramifications of those decisions (such as the impact on employee morale). Options for employers include:

  1. re-classifying those employees as non-exempt, converting their salaries to hourly wages and paying overtime;
  2. maintaining the exemption by increasing the salaries of the affected employees; and
  3. establishing a bonus or incentive program in compliance with the new rules that likely would increase the salary of currently exempt employees above the new salary level.

All of the foregoing options come with advantages and disadvantages and may lead to additional changes throughout an organization related to compensation and pay-related policies and procedures.  Finally, employers should take this opportunity to review all current exemptions and update related documents including job descriptions, relevant handbook provisions, organizational charts, payroll and time tracking policies and plans.

   Mr. Yates and Ms. Pawlicki are members of Eastman & Smith Ltd.'s Labor and Employment practice group and SHRM Certified Senior Professionals who represent employers in labor and employment matters.  Please contact them should you have any questions regarding the new rule.


   Disclaimer: The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.