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Department Of Labor’s proposed salary basis rule will make more employees eligible for overtime

On March 22, the Department of Labor (“DOL”) published a new proposed rule that would make several changes to current overtime law. The proposed rule, which is not yet in effect, would require that:

·       Employees make at least $679 per week ($35,308 annually) to potentially be exempt from overtime.

·       Employers be allowed to use nondiscretionary bonuses and incentive payments such as commissions that are paid at least annually to satisfy up to 10 percent of the salary threshold.

·       “Highly compensated employees” make at least $147,414 per year (compared with $100,000 under current law).

·       Going forward, the DOL commit to periodically reviewing and updating the minimum salary threshold (after a public notice and comment period).

The current salary requirement, which has been in place since 2004, is at least $455 per week or $23,660 annually. The proposed increase to at least $679 per week is below the $913 ($47,476) weekly amount proposed by the Obama administration in 2016 (far above the $30 per week used in 1938 when this law was first enacted).

The proposed weekly salary requirement is calculated using approximately the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (the South) and in the retail sector. This is the same formula used in 2004 to determine the current rate. The proposed increase to the amount required to meet the highly compensated employee exemption is equivalent to the 90th percentile of full-time salaried workers nationally, projected forward to 2020, which results in an annual compensation level of $134,004, which was proposed in 2016. The changes proposed in 2016 were invalidated by a court that ruled that the salary level exceeded the DOL’s authority. The court found that a salary level would have excluded an unusually high number of employees who pass the job duties test.

The proposed rule does not propose any changes to the job duties test (which, in addition to the salary requirement, requires that employees perform certain primary job duties to be eligible for exempt status).

Under this new proposal, employers are allowed to use nondiscretionary bonuses and incentive payments such as commissions that are paid at least annually to satisfy up to 10% of the salary threshold. This is a modification of a similar proposal that had been included in the 2016 proposal. As originally proposed, bonus or incentive amounts had to be paid at least on a quarterly basis.  That proposal was criticized by commenters who explained that annual bonuses can be substantial, and employers would be penalized if those bonuses were only creditable in the quarter in which they were paid.

The current proposed rule allows employers to make a final catch-up payment within one pay period after the end of each 52-week period to bring an employee’s compensation up to the required level. Even with the catch-up option, the employer must pay each exempt employee 90% of the standard salary level ($611.10 per week), and if at the end of the 52-week period the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 52 weeks ($35,308), the employer would have one pay period to make up for the shortfall (up to 10% of the standard salary level, $3,530.80).  Any catch-up payment would count only toward the prior year’s salary and not toward the salary in the year in which it was paid. While business hails the ability to include productivity and profitability bonuses as part of the salary threshold, it is not uncommon to find that the payment date of such awards often occurs weeks and sometimes months after the relevant period used to compute the amount due is completed.

Interested parties have until May 21, 2019 to submit comments before the rule becomes final. Even then, final rules can be challenged through litigation.

There are no specific steps to take with respect to the proposed rule right now. However, there is no time like the present to review job duties and salaries to make sure your employees are properly classified as exempt and non-exempt. The cost of addressing misclassification issues on the front end is insignificant compared with the potential costs associated with litigation.

Jim Dale and Melissa Healy are attorneys in the labor and employment group at Stoel Rives LLP. Jim can be reached at 206-387-4282 or james.dale@stoel.com and Melissa can be reached at 503-294-9263 or melissa.healy@stoel.com.   

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