Overtime Exemptions for White-Collar Jobs May Soon Require Higher Salary - McDermott Will & Emery

Overtime Exemptions for White-Collar Jobs May Soon Require Higher Salary



Proposed regulations will alter which white-collar employees remain overtime exempt. Staying vigilant on Fair Labor Standards Act compliance is critical; read on to learn more on proposed increases to the minimum salary necessary to qualify for the executive, administrative or professional exemptions.

In Depth

Proposed amendments to Fair Labor Standards Act (FLSA) regulations will alter which white-collar employees remain exempt from overtime. These proposals, which the US Department of Labor (DOL) issued on March 7, 2019, increase the minimum salary necessary to qualify for the executive, administrative, or professional exemptions.

Background: Status Quo on White-Collar (“Salaried”) Exemptions

The FLSA mandates overtime for hours worked in excess of 40 in a workweek. Yet, that statute also includes multiple exemptions. The most widely used are the so-called “white-collar” exemptions for executive, administrative and professional employees.

To qualify an employee for these white-collar exemptions, an employer must meet both a duties test and a salary test. The current salary test is $455 per week ($23,660 per year): an amount that has held constant since 2004.

Additionally, “Highly Compensated Employees” (HCE) in executive, administrative or professional roles are exempt if they satisfy a “less stringent, more flexible duties test” and the minimum salary requirement and earn $100,000 or more in total annual compensation.

Proposed Changes: The Future on White-Collar (“Salaried”) Employees

Earlier efforts to increase these salary levels were rejected by a federal district court in Texas. Rather than appealing that decision, DOL went back to the drawing board and has now issued its revised proposals, which address only the salary tests with the following increases:

  • Minimum weekly salary requirement rises to $679: $35,308 per year
  • Total annual compensation requirement HCE status rises to $147,414

Yet, these increases come with flexibility that was previously unavailable.

DOL proposes that employers be permitted to pay 90 percent of the weekly threshold ($611.10) in salary and make up the remaining 10 percent in non-discretionary bonuses and/or commissions. Employers will also be able to make a catch-up payment if the weekly salary and (10 percent of the) non-discretionary compensation did not satisfy the annual salary threshold of $35,308.

Although employers will be permitted to use non-discretionary bonuses and commissions to satisfy the HCE total annual compensation requirement, employers may not use non-discretionary compensation to satisfy the minimum weekly standard requirement for the HCE exemption.

These changes are not live today.

Proposed regulations are open for public comment until May 21, 2019. Thereafter, DOL will evaluate those comments and issue a final rule (which may be altered from the proposed regulations). Rulemaking is never quick, but DOL anticipates that these regulations will become effective in January 2020.

What Should Employers Be Doing Now?

These proposed regulations remind employers to stay vigilant in monitoring exempt classifications. Litigation challenging exempt classifications continues apace (and most often as class or collective actions sweeping in large numbers of employees with high dollar exposure in potential damages).

Recent class action lawsuits include challenges to the exempt status of health care workers such as Case Managers and Utilization Review Nurses. Glitches in the “salary basis” of payment (e.g., improperly reducing salary due to absence or damaged equipment) as well as failures to meet the requisite dollar cutoffs make for easy class action targets.

What can/should employers do now?

1) Evaluate which employees lose exempt status under the proposed increases

This is a simple eyeball test of a payroll run of exempt employees. If employees do fall below the thresholds, this is the time to consider whether—in the event the regulations are finalized—to increase salaries to retain the exemption or reclassify employees and pay overtime when they work more than 40 hours in a workweek.

A significant consideration in this analysis will be whether the employer is solid on the applicable job duties test. If not, this may be the time to reclassify to nonexempt. This consideration should involve counsel to ensure that those judgments remain privileged and not discoverable in litigation. Plus, whenever jobs are reclassified as nonexempt, that communication needs to be carefully vetted to avoid provoking litigation.

2) Audit ALL exempt-classified employees

Employers might also use this opportunity to audit whether all their exempt employees satisfy the job duties tests for the applicable exemptions. Case law morphs over time; so too does job content. Evaluations of exempt status need to be revisited, at least, quadrennially.

That evaluation needs to cross-check state laws because the FLSA does not preempt local laws. For example, the minimum salary thresholds in California ($960) and New York ($1,125 in New York City) are significantly higher than the current and newly proposed FLSA minimum salary thresholds. Further, some states like California have stricter job duties tests. Lastly, in states like California, Illinois and New York, the HCE exemption is simply not available.

3) Submit a comment to DOL

The entire process of rulemaking under the Administrative Procedure Act is designed to promote public participation. Every man, woman, child and organization in America is welcome to join in.

Comments can be detailed analyses of why these proposed salary levels are helpful or harmful; can suggest other changes (e.g., no duties test for HCE but instead an automatic safe harbor or measuring only total annual compensation); or can applaud those new provisions allowing additional flexibility.  More than mere cheerleading or complaining, however, is necessary to move DOL in its evaluation of those comments.