Labor Department Proposes Higher Salary Minimum for Exempt White Collar Workers

March 11, 2019Alerts

The salary level necessary to classify an employee as exempt from overtime is set to increase by nearly 50 percent – from $455 per week to $679 per week – under the U.S. Department of Labor's proposed amendments to the overtime regulations of the Fair Labor Standards Act (FLSA).

Although the proposed amendments are not as severe as those promulgated during the Obama Administration (which were subsequently enjoined), employers should reassess the status of certain exempt-level employees. The proposed amendments, released on March 7, 2019, are scheduled to take effect on January 1, 2020 and formally repeal the enjoined Obama Administration salary test regulations. 

Currently, under the FLSA, three factors must be satisfied to qualify as exempt from overtime under the white collar exemptions:

  • The employee must be paid on a salary basis that is not subject to reeducation based on the quality or quantity of the work performed. In other words the employee must receive a guaranteed payment each pay period.
  • The salary must be at least $455 per week, although some state and municipal laws may require a higher salary.
  • The employee must satisfy the professional, executive, administrative or computer duties tests.

The proposed amendments impact only the first two factors and they do not revise any of the duties that must be performed by employees to satisfy the white collar exemptions (i.e., the executive, administrative, professional, outside sales, and computer employee exemptions).

FLSA Overtime Exemption Changes

The proposed amendments essentially make three significant changes to the FLSA’s overtime exemptions.

First, they increase the weekly salary threshold that must be paid in order to classify an employee as exempt from overtime under the white collar exemptions from $455 per week ($23,660 per year) to $679 per week ($35,308 per year), with lower salary thresholds for Puerto Rico, Guam, the U.S. Virgin Islands, the Northern Mariana Islands and American Samoa. Again, some states and municipalities may have a salary threshold that is even higher than $679 per week (such as California and New York) in which case the employer must satisfy the higher salary level in order for the employee to be classified as exempt from overtime under the white collar exemptions.

Second, the proposed amendments allow an employer to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level provided that such nondiscretionary bonuses and incentive payments are paid at least annually. For example, an employer can satisfy the salary threshold by paying the employee $650 per week and paying an annual guaranteed bonus of at least $3,000.

Third, the proposed amendments modify the Highly Compensated Employee (HCE) exemption. Currently, under this exemption, employees are exempt from overtime under the FLSA if they receive at least $100,000 in compensation and they regularly and customarily satisfy one or more of the exempt duties referenced in the duties tests for the professional, executive, administrative or exemptions. The amendments modify the HCE by:

  • increasing the compensation threshold from $100,000 per year to $147,414 per year; and
  • requiring that employees be paid at least $679 per week on a salary basis.

Employers must remember that some states and municipalities do not recognize the HCE exemption, in which case employers cannot utilize this exemption.

Salary Level Increases

The proposed amendments state that the Department of Labor intends on increasing the salary levels every four years. However, rather than have automatic increases to the salary level as the Obama Administration promulgated, the Department of Labor stated that any future salary increases would be proposed through a separate notice and comment rulemaking. In other words, any future increases proposed to the salary basis test would be released by the Department of Labor and the public would be given the opportunity to comment on such proposal before the proposal went into effect.

The following chart summarizes key amendments to compensation under these FLSA regulations:

Current Rule

Proposed Rule Effective
January 1, 2020

Salary Level

$455 weekly

$679 weekly

HCE Total Annual Compensation Level

$100,000 annually

$147,414 annually

Automatic Adjusting

None

None, although Department of Labor proposes revising the salary level every 4 years through notice and comment rulemaking.

Bonuses/Incentive   Compensation No provision to count nondiscretionary bonuses and commissions toward the standard salary level.     Up to 10 percent of standard salary level can come from non-discretionary bonuses, incentive payments and commissions, paid at least annually.

As a result of these amendments, employers must reassess the status of their lower-level exempt staff. If exempt employees currently earn less than $679 per week and the employer wants to maintain the employee as exempt, assuming the duties tests are satisfied, the employer must raise the employee’s salary to at least $679 per week or raise the employee’s salary to $611.11 per week and pay a nondiscretionary bonus or incentive compensation at least quarterly in an amount that averages out to $67.90 per week. The other option is for employees to reclassify such employees as nonexempt and entitled to overtime pay. Whichever option the employer selects, it is important to work closely with counsel to ensure that the ramifications of the decision are well understood and properly implemented.

For more information about this Alert, please contact Glenn S. Grindlinger at [email protected] or 212.905.2305, or any member of Fox Rothschild’s Labor & Employment Department.