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March 20, 2019

The increased overtime salary threshold is back. On March 7, 2019, the U.S. Department of Labor (DOL) published a Notice of Proposed Rulemaking to raise the salary thresholds of the “white collar” overtime exemption rules. This is the second time in recent years that the DOL has attempted to increase these thresholds, and this latest effort is sure to be a hot topic in the coming months.

The Background: In May 2016, the DOL announced a final rule that would have increased the minimum salary for exemption to $913 per week ($47,476 annually) and the highly compensated requirement to $134,004; however, that rule was met with significant controversy from many small business interests and conservative lawmakers. In November 2016, the rule was enjoined by the U.S. District Court for the Eastern District of Texas before taking effect, and an appeal was stayed by the U.S. Court of Appeals for the 5th Circuit pending further rulemaking. If adopted, this proposed rule would rescind and replace the 2016 final rule.

The DOL’s new proposed rule would increase the salary threshold from $455 per week ($23,660 annually) to $679 per week ($35,308 annually). Additionally, under the proposed rule, the compensation threshold for highly compensated employees will increase from its current level of $100,000 per year to $147,414 per year. The proposed $35,308 threshold is in line with statements made by the Secretary of Labor, Alexander Acosta (prior to his confirmation in 2017), that the overtime threshold had not increased since 2004 and that adjusting the $23,660 threshold for inflation would bring it to $33,000.

Borrowing from the 2016 final rule, the proposed rule would permit employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to ten percent of the standard salary level. Under the proposed rule, though, the bonuses and incentive payments are required to be paid no less frequently than annually, rather than quarterly. The change from quarterly bonuses to annual bonuses is likely to reduce employers’ administrative burden and provide added flexibility in satisfying the salary requirements for non-exempt employees. Additionally, the proposed rule discusses raising the salary threshold every four years through a notice and comment process, rather than through automatic updates as was the case under the 2016 final rule. This is a welcome change for employers who worried that automatic increases would see the threshold increase too rapidly, effectively eliminating the exempt employee in certain industries.

For many employers, this proposed rule will have a significant impact on payroll cost. The DOL estimates that the increased threshold would result in over a million workers being newly eligible for overtime compensation. Accordingly, we expect employers to be proactive to mitigate the cost associated with the increasing salary threshold using a number of different tools. In the run up to the 2016 final rule we observed employers converting salaried employees to hourly employees, limiting employees to 40 hours per week by hiring additional workers, or increasing their employees' salaries to the new threshold. We expect to see much of the same leading up to the proposed rule. As is often the case, the best strategy for each employer will be dependent on that specific employer and its employee population. 

Although the proposed rule will present many challenges to employers, it also presents an opportunity for employers. To the extent that employers were considering reclassifying any employees from exempt to non-exempt, now may be a good time to do so. In the past, reclassifying positions could draw unwarranted suspicion from impacted employees and lead to frivolous, but costly, litigation. In the wake of the DOL’s announcement, changes can be attributed to the proposed rule, mitigating potential headaches.

The DOL will allow 60 days for public comment on the proposed rule before publishing the final rule, which they expect to take effect in January 2020. As with the 2016 final rule, the proposed rule is likely to receive a high volume of public comments, which will take the DOL time to review and incorporate into the final rule. In the meantime, please feel free to contact the experts in the Compensation and Benefits practice at Alvarez & Marsal if you have any questions or if you would like to discuss further.

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