Will a New Federal Overtime Rule Have Multiple Salary Thresholds?

 

Lisa Nagele-Piazza, J.D., SHRM-SCP By Lisa Nagele-Piazza, J.D., SHRM-SCP February 25, 2019
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[Update: On March 7 the DOL proposed one salary threshold for the white-collar exemptions.]

The Department of Labor (DOL) is expected to propose a new federal overtime rule in March that will likely increase the salary threshold for the white-collar exemptions to overtime pay under the Fair Labor Standards Act (FLSA).  

In a 2018 regulatory agenda, the DOL indicated that it would make some changes to the FLSA, including to the salary level for the overtime exemption, noted Anne Cherry Barnett, an attorney with Reed Smith in San Francisco. The update follows multiple rounds of judicial challenges to proposed overtime changes that were adopted by former President Barack Obama's administration.

In 2016, the Obama administration sought to raise the annual salary threshold to $47,476. However, a federal judge in Texas said that the Obama rule was invalid. For now, the 2004 annual salary threshold of $23,660 remains in place. To be exempt from the rule, employees must be paid a salary of at least the threshold amount and meet certain duties tests; if not, they must be paid 1 1/2 times their regular hourly rate for hours worked in excess of 40 in a week.

After the DOL proposed its 2016 rule, many employers expressed concern that it didn't establish varying salary thresholds based on region, as the cost of living differs widely around the country, said Josh Woodard, an attorney with Snell & Wilmer in Phoenix. So, in July 2017, President Donald Trump's DOL issued a request for information asking the public whether the new regulations should contain multiple salary levels and, if so, whether the levels should be set by employer size, census region, census division, state or metropolitan area.

"Accordingly, the new proposed rule may address this issue," Woodard said.

Regional Differences

The Obama administration's blocked $47,476 threshold represented the 40th percentile of earnings for full-time salaried workers in the lowest-wage census region—which was the South at the time. There are four census regions: Northeast, Midwest, South and West. The regions are further separated into nine divisions.



The 2016 rule would have automatically updated the threshold every three years to represent the 40th percentile of earnings for full-time salaried workers in the lowest-wage region.

Many employers and some economic experts opined that the 2016 rule set the threshold too high and would have resulted in lost jobs for workers and hardships for employers, Woodard said.

Employees and other economic experts said the current annual salary threshold ($23,660) is too low for today's work environment and fails to achieve the FLSA's original intent of limiting the exemptions to those employees on the higher end of the pay spectrum, he added.

The Trump administration's DOL has kept its cards close to the vest, so there is no clear indication of whether the DOL will issue a single threshold or multiple regional thresholds, Barnett said. However, if the salary level is too high, either as a single threshold or multiple regional thresholds, employers may need to limit work hours for employees who will have to be reclassified to nonexempt and paid overtime premiums, she said.

Regional thresholds would likely benefit employees in locations where the cost of living is higher, such as San Francisco, she said. However, she added, setting higher regional levels for locations that have a higher cost of living would likely create additional financial burdens for employers, raise costs of goods and services for local residents (since employers would need to recoup the additional cost for the increased overtime), and incentivize employers to misclassify employees or move their nonexempt positions out of areas where the cost of living is high.

Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C., and a former acting administrator of the DOL's Wage and Hour Division, said he would prefer to see a single salary threshold rather than multiple salary thresholds that vary by region, employer size or other factors.

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

The variable option has been considered and rejected many times in previous rulemakings, he added. For example, the now enjoined 2016 final rule stated that "the department has always maintained a salary level applicable to all areas and industries," and it relied on the 2004 rulemaking in noting that "adopting multiple salary levels is not administratively feasible." 

In addition to administrative burdens for the DOL, regional differences would create challenges for employers that operate in more than one area of the country, Robinson said.

What Threshold Level Is Expected?

Some commentators have suggested that the new proposal will be in the mid-$30,000 range, said Tamara Devitt, an attorney with Haynes and Boone in Costa Mesa, Calif. Experts point to various indicators, including Secretary of Labor Alexander Acosta's comments during his confirmation hearing that adjusting the current number for inflation would put the annual salary threshold at roughly $33,000. "But it remains to be seen," she said.

Barnett said a minimum annual salary threshold of approximately $32,000 to $35,000 would reflect a more reasonable increase for employers. "It is also likely that the increased salary threshold will not go into effect until 2020," she added.

However, employers should note that if the DOL doesn't articulate a new rule in 2019 and there's a change in federal leadership, "it is anyone's guess what might happen with the minimum salary test to meet the executive, administrative and professional exemptions to overtime under the FLSA," Barnett said. "Employers who are nimble and quick to adapt to whatever rule is ultimately issued will be best situated for compliance."

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