Employers have three months to prepare for the U.S. Department of Labor’s newly finalized overtime rule. But that is assuming they haven’t already, as the lift in the white-collar exemption threshold has been a long time coming.
On Tuesday the DOL released its final rule updating the salary threshold for white-collar exemption. Under the new rule, an employee must earn more than $35,568 a year, or $684 a week, to be exempt from overtime under the Fair Labor Standards Act’s salary test for white-collar workers. That jump from the current $23,660 watermark will make an estimated 1.3 million more American workers eligible for overtime, according to the DOL.
The final rule, which takes effect Jan. 1, lays out a more moderate increase than the roughly $47,000 annual earnings threshold employers braced for under the Obama administration. Employment attorneys say the $35,000 salary threshold will make more employees exempt in retail, hospitality, nonprofits and other industries with lower-paid supervisor roles.
The final rule comes with some rollbacks to the version initially proposed. The FLSA’s separate threshold for highly compensated employees, who are subject to a less stringent duties test for exemption, was set to jump from $100,000 to $147,414. But the final rule will merely bump the HCE threshold to $107,432.
Another point of consternation for employers was a proposed provision requiring the DOL to issue another rulemaking on the salary test every four years. That provision is gone in the final rule.
The rule makes no changes to the duties test, which employees must also meet to be exempt from overtime pay. Workers’ duties must fit the criteria of executive, administrative, learned professional, computer or outside sales employees who are exempt under the statute.
Employers have been following the ups and downs of the Labor Department’s overtime proposals over two administrations, starting with the Obama-era rule it proposed in 2016. The rush to comply with a near-doubling of the white-collar threshold ended when a federal judge struck down the rule in November 2016. Under President Donald Trump, the DOL proposed a new threshold in March that would affect less than half the workers
“This time, I think everyone’s just happy to have an answer,” said Micah Dawson, an associate with labor and employment firm Fisher Phillips in Denver.
The Jan. 1 effective date gives employers only three months to come into compliance. The tight window might be to the DOL’s advantage, however. The rule is likely to face a legal challenge from workers’ groups who supported the Obama-era overtime rule, and there’s less time for litigation to halt the rule before its effective date.
But that’s assuming the legal challenge succeeds, which Dawson said is doubtful. The lawsuit would come under the Administrative Procedure Act and have to show deficiencies in the DOL’s rulemaking process. But that would be difficult in this case, Dawson said, because the department offered ample opportunities for public comments and was thorough in addressing them, among other reasons. “I can’t really see at this point a court finding that [a challenge meets] the very high standard of arbitrary and capricious” decision-making from the DOL, Dawson said.
Bill Berger, a labor and employment attorney and founder of L2S Legal in Denver, said the final rule’s tight window shouldn’t be a compliance issue for many employers. His clients had already reviewed their compensation practices and adjusted payrolls to comply with even the higher Obama-era threshold. “They all have already responded,” he said.
Even if the Labor Department hasn’t committed to raise the salary threshold again, it will only go up over time, Berger said.
Both the Obama and Trump administration elected to raise it, and it will “definitely” go up again under a future Democratic administration, he added.
As with the poverty line or minimum wage adjustments, changes to the FLSA salary threshold will become dependent on who’s president, Berger said. “Ultimately, it’s a political act to revisit these kinds of numbers.”
When the threshold does rise again, employers will increasingly use different tools the overtime rule provides to get certain workers to the exemption threshold without raising their salaries, Berger said.
One is the ability count nondiscretionary bonuses and incentive payments paid to the employee toward up to 10% of the salary threshold. Another tool the rule provides is a “catch-up” payment employers can give the employee at the end of the year to get their annual earnings to the threshold.
Dawson said employers should bear the duties test in mind, as it still factors into the exemption analysis and was left unchanged by the new overtime rules.
“Just because you’re paying someone $35,000 a year doesn’t make them exempt.”
— Doug Chartier