The U.S. Department of Labor’s (DOL) proposed overtime rule is now available. The 219-page proposal was submitted for final approval in January, according to the Office of Management and Budget.

At the outset, the rule proposes to rescind the 2016 final overtime exemption rule, and to update the current governing standards from the 2004 rule. As employers will recall, the 2016 final rule was invalided by a federal court, and on appeal, the Fifth Circuit stated that it would “hold the appeal in abeyance while the DOL undertakes further rulemaking to determine what the salary level should be.”

Currently, to qualify for one of the Fair Labor Standard Act’s (FLSA) “white collar exemptions” from minimum wage and overtime, FLSA regulations say employees must meet certain minimum tests related to their primary job duties and be paid on a salary (or in certain cases, fee) basis at not less than a specified minimum amount. These include the executive, administrative, professional, and computer employees exemptions.

The 2016 rule did not include any proposed changes to the duties’ test, and neither does the newly released rule. Instead, the new proposed rule again focuses primarily on raising the salary and compensation levels needed for white collar workers to be exempted. Specifically, the DOL proposes the following:

• Increase the standard salary requirement from $455 per week currently (or $23,660 per year) to $35,308 per year. This is a middle ground between the current salary threshold level of $23,600, and the threshold level proposed in the 2016 rule of $47,476. The DOL anticipates that the jump in salary level will affect 1.1 million employees who are currently classified as exempt.
• Increase the total annual compensation requirement needed to qualify for the FLSA’s Highly Compensated Employee (HCE) test from $100,000 to $147,414, which is an increase of the level in the 2016 rule, of $134,004. The amount of $147,414 is the equivalent to the 90th percentile of full-time salary workers nationally using 2017 Current Population Survey (CPS) data, inflated to January 2020. The HCE test was created back in 2004 as a way of exempting highly paid employees from the FLSA’s overtime requirements, if they customarily and regularly performed at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard exemption tests.
• Nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis, may be used to satisfy up to 10 percent of the standard salary level.
• A special salary level to Puerto Rico, the Virgin Islands, Guam, a separate special salary level to American Samao, and an updated special weekly “base rate” to the motion picture producing industry.
• The DOL will intend to propose updates to the salary and compensation levels every four years. This is different from the 2016 rule, which built in automatic increases to the salary level.

The new rule appears to address many of the issues that led to the legal challenges and invalidation of the 2016 rule. Once the rule is published in the Federal Register, the public will be able to submit comments for 60 days.

Employers should also be mindful that state laws are often more stringent than the federal law. In December 2016 New York raised the exemption levels for the state on a tiered basis according to geographic location. All areas of New York are currently subject to high salary exemption levels (e.g., the salary exemption level for update New York employee raised to $43,290/year on December 31, 2018).

Employers are advised to revisit their employee classifications and to begin identifying which employees would be affected by the new DOL rule if it is enacted, and the forecasted cost implications of the same.

For more information, contact:

• Christopher P. Maugans
• Caroline J. Berdzik
• Kristin Klein Wheaton
• Peter J. Woo
• Or another member of our Employment and Labor Practice Group