The US Department of Labor unveiled its new proposal for updating overtime regulations last Thursday, offering a version of the rule that would expand overtime eligibility to more employees, but millions fewer than the one the Obama administration attempted to enact in 2016. The proposed rule raises the salary threshold at which executive, administrative, or professional employees become exempt from overtime requirements from $23,660 to $35,308: higher than many businesses expected but a far cry from the $913 per week, or $47,476 per year, set by the previous administration, Proskauer attorney Allan Bloom notes in a blog post summarizing the finer points of the proposal. Up to 10 percent of that minimum can be satisfied through non-discretionary bonuses, incentives, or commissions, or through “catch-up” payments made at the end of the year, which effectively reduces the weekly minimum further.
Another exemption for highly compensated employees would increase from $100,000 to $147,414, which is actually higher than the Obama administration’s threshold of $134,004. The new proposed figure equates to the 90th percentile of full-time salaried workers nationally, projected forward to 2020. Employees are exempt from overtime if they meet this higher level of compensation as long as they are primarily engaged in office work and regularly perform at least one of the duties of an executive, administrative or professional employee. If the proposed rule comes into force as written, employers of workers who are no longer exempt based on their level of compensation will have to decide whether to pay them overtime or bump their salaries up over the threshold. “Paying overtime on $125,000 per year is a huge economic burden, but it still may be less expensive than going to the new level,” Seyfarth Shaw attorney Alexander Passantino tells Lisa Nagele-Piazza at SHRM.
One feature of the Obama-era rule, subsequently struck down by a federal judge in 2017 before coming into effect, to which employers objected was its scheme for automatically increasing the threshold every three years based on inflation. This was intended to ensure that lack of legislative or regulatory action did not result in an outdated minimum: The threshold had not been updated since 2004, which was the first change since 1975. The new proposal does not include automatic increases. Instead, the notice of proposed rule-making expresses the department’s “intention to propose updates to the earnings thresholds every four years. This would provide clarity and help workers and employers by having a regular and orderly process for future changes.”
The new proposal also does not change the duties tests for overtime eligibility, Ryan Mick, an attorney with Dorsey & Whitney in Minneapolis, tells SHRM’s Allen Smith, which “would have required many employers to undertake a far more complex analysis to determine exempt status for many employees.” Still, it may be a good time for employers to make sure their exempt employees meet the existing criteria:
Jeffrey Ruzal, an attorney with Epstein Becker Green in New York City, recommended that employers audit their exempt workforces now to determine whether employees qualify for white-collar exemptions under the primary duties criteria of the different exemptions:
- For the executive exemption, employees’ primary duties must be to manage the enterprise or a department or subdivision of the enterprise, and to customarily and regularly direct the work of at least two employees, and the employee must have the authority to hire or fire, or his or her suggestions and recommendations as to the hiring, firing or changing the status of other employees must be given particular weight.
- For the administrative exemption, employees’ primary duty must be to perform office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers, and must include the exercise of discretion and independent judgment with respect to matters of significance.
- For a professional exemption, employees’ primary duty must be work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study, or in one of a few other similarly highly specialized fields, such as teaching, computer analytics and engineering.
Employers do not have to wait for the final rule to review the duties. “It is possible that employees currently classified as exempt fail to meet the primary duties tests,” he said.
The proposal will now be subject to a 60-day public comment period; officials expect a final rule to come into effect next January. If enacted in its current form, the new rule will expand overtime eligibility to around one million workers; the Obama rule would have expanded it to over 4 million. Even though the previous administration’s rule never came into effect, the ruling overturning it came so close to the implementation deadline that many employers had already adjusted salaries to employees over the threshold; many of these adjustments remained in effect after the new rule was canceled, as it is difficult to renege on a raise without doing serious damage to employee morale.
Similarly, many employees with salaries just under the proposed new threshold will likely receive pay bumps to ensure they remain exempt under the new rule. Organizations make these adjustments to save money, of course, but employers have also argued that it can feel like a demotion for a salaried employee to begin having to track their work hours for overtime purposes, even if they end up earning more. Employees who lose exempt status may also find their employers micromanaging their schedules to ensure that they aren’t working more than 40 hours a week and accruing overtime.
Overall, Bloom calls it “a fairly straightforward proposed new rule that won’t make a difference to employers in states with already-higher salary minimums for exemption” like New York and California. That doesn’t mean it won’t be subject to heated debate, however. Heidi Shierholz, a former chief economist in the Labor Department who helped craft the Obama administration’s rule, told the New York Times that she was disappointed with the new threshold the Trump administration had set:
“Their analysis of the rule looks similar to what we did,” said Ms. Shierholz, now director of policy at the liberal Economic Policy Institute. “The problem is their own analysis shows millions fewer workers get covered.”
But Tammy McCutchen, one of the architects of the Bush administration’s increase, said she was pleased that the department had set the threshold at about the 20th percentile of earnings for salaried workers in the South — in line with where she and her colleagues had set it in 2004.
Small and medium employers are expected to challenge the new rule, Employee Benefit News reports, as even the more limited increase in the salary threshold will place a greater burden on them than on larger organizations, many of which had already overhauled their payrolls in response to the Obama administration’s scuttled rule change:
The majority of business groups were critical of Obama’s overtime rule, citing the burdens it placed particularly on small businesses that would be forced to roll out new systems for tracking hours, recordkeeping and reporting. …
Challenges to the new rule will likely occur as well, based on similar complaints of administrative burdens, but a legal challenge might be more difficult to pass this time around. “It would not surprise me at all to see legal challenges to the final rule, possibly from both employer advocates and employee advocates, which will likely be issues months from now,” notes Brett Coburn, a partner at the law firm Alston & Bird.
The lack of automatic adjustments in the new proposal, on the other hand, makes it less vulnerable to a lawsuit. “By excluding this provision, the department is reducing the chance that a lawsuit will be filed challenging a final rule when it’s issued,” Alfred Robinson Jr., an attorney with Ogletree Deakins and a former Labor Department administrator, explains to Nagele-Piazza at SHRM. “The days of waiting 15 to 20 years for increases in the minimum salary for exemption are likely over,” Proskauer’s Bloom adds in comments to SHRM. “I think we can expect more frequent updates to the salary thresholds, even if nothing is written into the regulations to that effect.”
This post is published for informational purposes only and does not constitute legal advice or an opinion on the legal matters discussed within. Employers should consult their general counsel whenever they have questions pertaining to laws, regulations, or potential liabilities.