Department of Labor Proposes Raising the Overtime Salary Threshold: Is Your Company Ready?
On Thursday, March 7, 2019, the U.S Department of Labor released a long-anticipated proposed rule extending mandatory overtime coverage to approximately 1.1 million additional workers nationwide. The Department of Labor now is seeking public comment on the rule and anticipates publishing a finalized version in advance of the 2020 election.
The proposed rule raises the salary threshold under which employees are automatically entitled to overtime pay to $35,308 from the current threshold of $23,660 set in 2004. This increase is based on the same methodology used in 2004, setting the salary level at approximately the 20th percentile of earnings of full-time salaried workers in the lowest-earning region. The proposed rule also increases the highly compensated employee salary level from $100,000 to $147,414, which is roughly equivalent to the 90th percentile of full-time salaried workers. This increase is anticipated to expand overtime coverage to approximately 200,000 currently exempt employees.
The Obama Administration proposed an increase to $47,476 in 2016, which would have expanded overtime coverage to roughly 4 million workers; however, that increase was blocked by a Texas court in 2017 and remains on appeal. The salary threshold proposed by the Trump Administration is significantly lower, but still higher than many anticipated, and is likely to result in legal challenges. The proposed rule is also less expansive than the Obama Administration’s proposal because it does not include automatic periodic increases, but rather provides for discretionary increases after a period of comment every four years. The rule also leaves in place the standard duties test currently used to determine exempt status for employees over the salary threshold.
Employers can anticipate a final rule in early 2020 and should prepare for the coming changes. Employers should start by identifying currently exempt employees making more than $23,660, but less than $35,308 and assess those employees’ hours to determine whether they typically work more than 40 hours per week and, if so, calculate estimated overtime costs under the new rule. Employers also should review highly compensated employees making between $100,000 and $147,414 per year. The exempt status of those employees will depend on whether they meet the criteria for exemption under the standard duties test, rather than the reduced duties requirements of the highly compensated employee test.
Employers with affected employees will need to assess whether it is more cost-effective to pay the employee overtime or to increase the employee’s salary to or above the salary level threshold. Alternatively, the rule allows employers to count nondiscretionary bonuses and incentive payment, including commissions, to satisfy up to 10 percent of the salary level test, provided that such bonuses and payments are paid at least annually. Regardless of how these issues are addressed, employers should be prepared to respond to employee questions regarding employee salaries and exempt status.
If you need assistance with an analysis of your workforce or have questions regarding the proposed rule, please contact Eastman & Smith for guidance.
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.