The DOL published the Notice of Proposed Rulemaking (NPRM) underlying the new rule on March 22, 2019. In response, the DOL received more than 116,000 comments. Based on those comments, the DOL made several changes that are reflected in the 2019 Final Rule.
The 2019 Final Rule, which will take effect on January 1, 2020, will affect the salary level test as follows:
- Raises the standard salary level from $455 per week ($23,660 per year) to $684 per week ($35,568 per year). This is significantly lower than the invalidated 2016 Final Rule, which would have raised the threshold to $913 per week ($47,476 per year).
- Allows up to 10 percent of the salary level to be satisfied by payment of nondiscretionary bonuses, incentives, and commissions that are paid annually or more frequently. The rule also provides for an end-of-year catch-up payment if such bonuses fall short of the threshold.
- Modestly updates the highly compensated employee (HCE) total annual compensation level to $107,432 from the current level of $100,000. The DOL abandoned a much higher proposed threshold of $147,414 in response to comments following publication of the NPRM.
The 2019 Final Rule also creates an alternative salary level schedule for U.S. territories and creates an exemption from the salary basis test for the motion picture industry under certain circumstances.
The 2019 Final Rule also is notable for what it does not do. The new regulations do not alter or affect the long-standing "duties test" despite repeated suggestions from both the Obama- and Trump-era DOL that changes were under consideration. As a result, positions must still satisfy the existing duties test to qualify for exemption regardless of salary level. Additionally, the new rule does not contain a mechanism to automatically adjust the salary level standards. As a result, future increases will require further rulemaking. This change avoids an aspect of the 2016 Final Rule that was challenged as violating the Administrative Procedure Act, which required increases every three years based on a combination of inflation and the Consumer Price Index.
The DOL estimates that the 2019 Final Rule will lead to an additional 1.2 million currently exempt workers - who earn more than $455 per week but less than $684 per week - gaining overtime eligibility. An additional 101,800 workers are currently exempt under the HCE exemption but earn less than the new $107,432 threshold, meaning they too may become overtime eligible if no intervening changes are made by their employers. In sum, the DOL estimates that employees will receive $298.8 million extra in pay each year.
Effective compliance will require prompt employer action. Employers should be prepared to:
- Evaluate exempt positions budgeted for salaries between $23,660 and $35,568 per year.
- Evaluate HCE positions budgeted for salaries between $100,000 and $107,432 per year.
- Reclassify current exempt positions to non-exempt for cases where there will not be a base salary increase to the minimum thresholds.
- Examine existing and potential bonus and commissions plans as an alternative to reclassification.
- Develop internal messaging to aid employees in understanding the changes to their compensation and classification.
As indicated above, employers have an array of options to ensure compliance. Unfortunately, with only three months until the 2019 Final Rule's effective date, employers will need to take quick and possibly complex actions to comply with the new requirements in time. Additionally, of all the tasks listed above, employers should be mindful that, while the new rule has been presented as a worker protection, it may be perceived by employees as a loss of both status and income.
Reed Smith's Labor & Employment team has extensive experience guiding employers through the process of auditing existing roles; constructing creative, business-specific solutions to address reclassification needs; and effectively communicating reclassification-related changes. If you have any questions or require assistance with this process, an experienced Reed Smith Labor & Employment attorney is ready to assist.
- Department of Labor, dol.gov
Client Alert 2019-238
