DOL Justifies More Gradual Salary Level Increase for Highly Compensated Exemption

Allen Smith, J.D. By Allen Smith, J.D. September 26, 2019

In response to businesses' concern that its proposed overtime rule's salary threshold for highly compensated employees was too high, the U.S. Department of Labor (DOL) raised it less steeply in the final rule that was announced earlier this week. The DOL increased the exemption threshold for highly compensated employees from $100,000 a year to $107,432 rather than to $147,414, as originally proposed. The change takes effect Jan. 1, 2020.

The highly compensated employee test allows high earners to be exempt from overtime pay even if they don't meet all the duties of the white-collar exemptions.

The final rule bases the highly compensated employee threshold on the 80th percentile, rather than the 90th percentile, of all full-time salaried workers' earnings nationwide. To have increased it to $147,414 would have resulted in "significant administrative burdens and compliance costs, including costs associated with reassessing the exempt status of many highly paid white-collar workers under the standard duties test," the DOL stated in the preamble to the final rule.

"Yet, while employers would incur these burdens and costs, the vast majority of currently exempt highly compensated employees would remain exempt under the standard test," the DOL added. "In short, the department would be imposing significant administrative costs on employers for a limited effect."
Nonetheless, the DOL agreed that the proposed level was so high that it would have excluded employees who should be exempt under the highly compensated employee provision, particularly those in lower-wage regions and industries.

The DOL disagreed with commenters who opposed any increase in the highly compensated employee threshold. It estimated that the change to the highly compensated employee test would affect roughly 101,800 individuals.

The change to the standard salary level, which the DOL increased from $23,660 per year to $35,568, will make approximately 1.3 million workers eligible for overtime pay.

Standard Duties Test vs. Highly Compensated Employee Test

Individuals who earn at least the standard salary level must satisfy a standard duties test to be exempt. Each white-collar exemption has slightly different duties tests:

  • Executive exemption. The employee's primary duty must be managing the enterprise or a department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers (or the employee's suggestions and recommendations as to hiring, firing or changing the status of other employees must be given particular weight).
  • Administrative exemption. The employee's primary duty must be office or nonmanual work that is directly related to the management or general business operations of the employer or the employer's customers. The employee's primary duty also must include the exercise of discretion and independent judgment with respect to matters of significance.
  • Professional exemption. The employee's primary duty must be work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction and study.

For highly compensated employees, there is a reduced duties test:

  • The employee's primary duty must be office or nonmanual work.
  • The employee must customarily and regularly perform at least one of the bona fide exempt duties of an executive, administrative or professional employee.

"None of the duties tests are changed in the final rule, which is significant and positive," said Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C.

There is still a duties test for highly compensated employees, though it's not as exacting as the duties tests for the executive, administrative and professional exemptions, said Kathleen McLeod Caminiti, an attorney with Fisher Phillips in Murray Hill, N.J., and New York City.

Don't Make Assumptions Based Just on Salary

Too often, employers assume that workers making the highly compensated employee earnings threshold are exempt without considering whether their responsibilities meet the reduced duties test, Caminiti said.

"If someone is in a tech role, take a close look," she added. That person might be highly compensated but not perform one of the duties of an executive, administrative or professional employee and therefore not qualify for the executive, administrative or professional exemption.

A tech employee doesn't necessarily fit in the computer employee exemption either, she cautioned. That exemption applies to analysts and software engineers, not someone who is troubleshooting.

If an employer is wrong about the classification of a highly compensated employee, "that is a big overtime bill," she said.

[SHRM members-only toolkit: Determining Overtime Eligibility in the United States]

Tread carefully when deciding whether paralegals or someone with responsibility for budgeting, auditing or finance are exempt under the highly compensated employee test. Whether they are highly compensated isn't the final word, she emphasized, though she noted that the DOL provided in an opinion letter earlier this year that paralegals may be subject to the highly compensated employee test.

The primary duties of highly compensated employees who do not meet the standard duties for either the executive, administrative or professional exemption may be an amalgamation of numerous different responsibilities. If they more than occasionally perform at least one exempt duty and meet the highly compensated employee salary threshold, the workers are exempt.

Not Much Litigation Yet

Lee Schreter, an attorney with Littler in Atlanta, said there hasn't yet been much litigation over whether highly compensated employees are exempt. If median wages go up, the salary level for highly compensated employees may become more relevant, she said.

Even at the $107,432 level, the threshold for highly compensated employees is still a very high number, noted Robert Boonin, an attorney with Dykema in Detroit and Ann Arbor, Mich.

The highly compensated employee test was instituted with the 2004 final overtime rule. Even before it was instituted, the DOL would not challenge the exempt status of employees with high salaries, Schreter commented.

She said she was "pleasantly surprised" to see the DOL increase the highly compensated employee threshold more gradually than it had proposed.

Nonetheless, Schreter predicted that if Democrats gain control of the White House, there may be more rulemaking and a push for higher salary levels—for both the standard salary threshold and highly compensated employees.

[Visit SHRM's resource page on the FLSA Overtime Rule.]



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