2019 Promises Revised Overtime Rules
Three years ago, employers found themselves scrambling to prepare for a new federal overtime rule that would have doubled the minimum salary level for the “white collar” exemptions from $23,660 annually ($455 per week) to $47,476 annually ($913 per week). Set to go into effect on December 1, 2016, this new rule was struck down by a Texas federal court in November 2016, sparing employers from having to choose between (1) increasing the compensation of certain of their employees traditionally treated as exempt employees not entitled to overtime compensation, or (2) treating such employees as non-exempt and thus entitled to overtime pay for hours worked in excess of 40 in a workweek.
Although opposed to the Obama-era rule almost doubling the “white collar” minimum salary threshold, the Trump Administration Department of Labor has signaled support for some increase in the minimum salary level – which has not been updated since 2004. In July 2017, the DOL published a Request for Information seeking public comment on a revised overtime rule. The public comment period closed in September 2017 and was followed by “Listening Sessions” in several cities seeking input on possible regulations. In its Fall 2018 Regulatory Agenda, the DOL noted its intent to “issue a Notice of Proposed Rulemaking (NPRM) to determine the appropriate salary level for exemption of executive, administrative and professional employees.” The current timetable for the issuance of a proposed new salary threshold rule is March 2019, which means that the new rule likely would not go into effect until 2020.
Based on the Senate confirmation hearing testimony and other public comments by current Secretary of Labor Alex Acosta, the forthcoming NPRM will likely propose raising the minimum salary threshold to around $33,000 annually. Whether the new rule includes a mechanism for automatic upward adjustments of the salary threshold – a very controversial feature of the Obama-era rule that was struck down by the Texas court – remains to be seen.
In addition to a revised minimum salary threshold, we may also see new rulemaking on the calculation of a non-exempt employee’s “regular rate of pay” – the sum an employer must use in calculating overtime pay. Many employers make the mistake of assuming that calculating an employee’s overtime pay premium is a simple matter of multiplying an employee’s standard hourly rate times 1.5. Under the current regulations, however, an employee’s “regular rate of pay” includes other forms of compensation that are often overlooked by employers in calculating OT pay – such as nondiscretionary bonuses and commissions, shift differential and lead person premiums, regular bonuses allocated across pay periods, and the value of meals and lodging provided for the employee’s benefit. For example, if an employer pays a nondiscretionary productivity bonus to non-exempt workers on a quarterly basis that bonus must be taken into account in calculating the workers’ regular rate and the amount of the time-and-a-half OT premium. Employers currently must allocate the quarterly bonus over the workweeks to which the bonus applies and, in any week in which <pay”>OT rate varies from week to week, and increasing the likelihood of legal exposure borne from simple inadvertence. Needless to say, simplified, updated rules on calculating “regular rate of pay” would be a welcome change for employers.
Stay tuned for future updates as the Department of Labor issues its proposed new overtime rules this March. In the meantime, keep the following in mind when it comes to your payroll administration practices and overtime obligations:
Just because you pay an employee a salary that meets or exceeds the current minimum salary threshold does not mean the employee is exempt from and not entitled to OT pay. It is not just about how an employee is paid and what an employee is paid. To be exempt from OT under one of the Executive, Administrative and Professional exemptions, the “duties test” applicable to the exemption must also be satisfied. For example, to qualify for the Executive exemption an employee must (1) have as his or her “primary duty” management of the enterprise or a recognized department or subdivision, (2) regularly direct the work of two or more full time employees or equivalents, (3) have authority to hire/fire, or make recommendations given particular weight regarding changes in employee status. An exempt Administrative employee (1) must primarily perform office or non-manual work, (2) the work performed must be directly related to management or the general business operations of the employer, and (3) the employee must exercise independent judgment and discretion with respect to matters of significance rather than simply applying well-established techniques, procedures or specific standards described in manuals or other sources.
Assessing whether, in reality, an individual employee or position within your organization satisfied the applicable “duties test” is a difficult but important exercise. Employers would be wise to regularly revisit and thoughtfully audit their employment classifications with the assistance of counsel, document that they have done so and the conclusions they have reached, and timely correct any errors they uncover.
Remember there can be, and often are, critical differences between state wage & hour law and federal wage & hour law applicable to you as an employer. As a general proposition, your employees are entitled to the benefit of the law that is most favorable to them. For example, the weekly hours threshold for OT compensation under Minnesota law is currently 48 hours, whereas the federal law threshold is 40 hours. Minnesota employers should not make the mistake of assuming that because all of their business is done within Minnesota federal wage & hour law does not apply to them – and thus their OT obligation does not kick in until an employee has worked 48 hours in a workweek. With only rare exceptions, virtually every employer in this day and age engages in interstate commerce in some aspect of their business and is therefore subject to federal wage & hour laws.
Several states and localities have minimum salary thresholds that are higher than the federal law minimum of $23,660 annually ($455 per week) depending on employer size and number of hours worked, including Alaska, California, Colorado, Maine, New York City, New York State, Oregon, and Iowa ($500 per week). Currently, the minimum salary threshold under Minnesota and Wisconsin law is the same as federal law, although the Minnesota minimum wage exceeds that of federal law.
To be exempt, an employee must be paid on a “salary basis,” which generally means that the employee’s guaranteed salary must be paid for any week in which any work is preformed regardless of the hours worked or quantity/quality of the work performed. Deductions from pay for things such as partial day absences will be deemed inconsistent with compensating an employee on a “salary basis” and thus put in peril the employee’s exempt status. Before deducting sums from an exempt employee’s pay, you must carefully assess whether the deduction can be taken under applicable state and federal law without risking the employee’s exempt status.