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Exempt employee salary increase rapidly approaching
SHERRY KARABIN
Legal News Reporter
Published: November 8, 2019
It has been over 15 years since an earnings threshold increase took effect for white collar employees exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA).
But that’s about to change. The DOL announced a new final rule on Sept. 24, 2019, raising the earnings threshold for exempt executive, administrative and professional employees. The new rule will be implemented on Jan. 1, 2020 and is expected to make an additional 1.3 million employees eligible for overtime pay under the FLSA.
“Under the Fair Labor Standards Act employees are presumed to be eligible for overtime pay for any hours worked over 40 in a workweek,” said Roetzel & Andress Employment Services shareholder Karen Adinolfi. “The FLSA provides certain exemptions to the requirement for employees who are paid on a salary basis, earn over a specified threshold amount and perform qualifying duties.”
The earnings threshold for executive, administrative and professional exemptions has remained at $455 per week, an annual equivalent of $23,660 a year, since 2004. On Jan. 1, 2020, the threshold will increase to $684 per week or $35,568 per year.
Further, the annual total compensation requirement for the “highly compensated employee” exemption will increase from $100,000 per year to $107,432 annually.
“While the threshold levels are changing, the salary test and the duties test that determine whether an employee qualifies for the exemption remain the same,” said Adinolfi.
“The duties test focuses on whether an employee is primarily performing job duties that qualify as exempt duties,” said Jim Patrick, an associate in the Cleveland office of Fisher Phillips. “When reviewing whether an employee performs exempt duties, it is important to remember that job titles do not determine exempt status, but rather, the focus is on the duties actually being performed by the employee.”
Under the final rule, employers will be allowed to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the new standard salary levels. The nondiscretionary bonuses and incentive payments must be paid at least annually.
“While the ability to rely on nondiscretionary bonuses and incentive payments may be helpful for some employers, its value is limited by the potential difficulties employers may encounter in properly utilizing this option,” said Patrick.
“One potential difficulty is a situation where an employer is planning to rely on nondiscretionary bonuses and incentive payments to help satisfy the salary threshold, but the employee ultimately falls short of making enough in nondiscretionary bonuses and incentive payments,” he said.
“In this situation, the final rule allows employers to make a catch-up payment to ensure the salary threshold is met,” said Patrick.
The DOL previously issued a final rule during the Obama Administration, which would have more than doubled the salary threshold to $47,476. However, in 2016, a federal court in the Eastern District of Texas enjoined the rule, which would also have instituted automatic increases every three years.
“The current threshold has long been considered controversially low,” said Adinolfi. “However, the Obama Administration’s rule faced significant opposition.
“The upcoming change is a balance between those two extremes, as it falls at the midpoint between these two dollar amounts,” she said.
With 2019 quickly coming to a close, Adinolfi and Patrick are advising employers to review the job duties and compensation packages of all their exempt employees to determine whether these employees are still performing exempt duties, and if so, then decide if it makes sense to raise their salaries to the new threshold level.
“If the employer does not wish to raise the salary or determines that the duties of these employees in question do not meet the duties test, then they will need to re-classify these employees as non-exempt and take steps to implement required recordkeeping practices for them,” said Adinolfi.
“Even though an employee may perform exempt duties, in certain cases, it may be more economical for employers to change an employee’s status from overtime-exempt to overtime-eligible, rather than increase that employee’s salary to meet the new threshold,” said Patrick.
“The decisions will need to be made on a case-by-case basis,” she said. “However, the clock is ticking so it’s important to do the review as soon as possible.”