Department of Labor Issues Proposed Overtime Rule

Last week, the United States Department of Labor (DOL) issued its much-anticipated proposed rule to update overtime eligibility under the federal Fair Labor Standards Act (FLSA).  The proposed rule would raise the salary threshold for exemption from the current $455 per week ($23,660 annually) to $679 per week ($35,308 annually).  The DOL estimates that this change will make approximately one million more workers eligible for overtime.

Under the FLSA, an employee is generally exempt from receiving overtime pay for hours worked over forty hours in a workweek if the following requirements are satisfied: 

“(1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”);

(2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and

(3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).”¹

The salary level threshold has not been updated since 2004. Under the Obama administration, the DOL issued a final rule in 2016 that would have raised the salary level threshold to approximately $47,000 annually. That rule was invalidated by the federal district court for the Eastern District of Texas. An appeal of the district court’s decision has been held in abeyance pending further rulemaking by the DOL. The DOL now states that it proposes to rescind formally the 2016 rule and apply the same methodology that was used to set the 2004 salary level to current data in setting the new salary level. “The 2004 final rule set the standard salary level at approximately the 20^th percentile of earnings of full-time salaried workers in the lowest-wage census region (then and now the South), and in the retail sector. This proposed rule would do the same.”²

In addition to raising the standard salary level threshold, the proposed rule would also:

• raise the total annual compensation level for exemption as “highly compensated employee” from the current $100,000 per year to $147,414 per year, and
• allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, provided the payments are made on an annual or more frequent basis.

Contrary to the rule proposed by the Obama administration, there would not be automatic increases in the salary level threshold; rather the DOL is asking for public comment on its proposal to have periodic updates that would require “notice-and-consent” rulemaking. Notably, the proposed rule would make no change in the “duties test.”

The proposed rule will be published in the Federal Register, likely within the next several days. The public will have 60 days from the date of that publication to provide comments on the proposed rule to the DOL. The DOL will then consider those comments, make possible revisions in the proposed rule, and issue a final rule. Any changes for employers and employees will not take effect until issuance of a final rule. 

Again, the DOL anticipates that approximately one million employees who currently earn more than $455 per week, but less than the proposed salary level of $679, could become eligible for overtime once the proposed rule becomes final. The DOL noted that, “Employers may opt to raise salary levels, reorganize workloads, or spread work hours in order to avoid payment of overtime pay.”³ Employers should review their current classification of employees as exempt or non-exempt from overtime and determine whether the increase in the salary level may require changes in that classification.

1 DOL Fact Sheet: Notice of Proposed Rulemaking to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees. 

2 Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, ___ Fed. Reg. ___ (proposed March 7, 2019) (to be codified at 29 C.F.R. pt. 541 (Proposed Rule), p.8. 

3 Proposed Rule, footnote 2, p. 8.