DOL Aims to Raise Salary Level for Highly Compensated Exemption

Workers who earn higher salaries must meet a reduced job-duties test


In addition to increasing the salary threshold for white-collar exemptions, the Department of Labor's (DOL's) newly proposed federal overtime rule would raise the salary cutoff for highly compensated employees to $147,414. Here's what employers should know about the potential change.

"It's a big jump," said Alexander Passantino, an attorney with Seyfarth Shaw in Washington, D.C. The proposed level is nearly $50,000 a year higher than the current $100,000 threshold. Workers who earn at least this much may qualify for exempt status if they meet a reduced duties test.

Workers who don't earn the minimum salary may need to be given raises or reclassified to nonexempt status and paid overtime premiums. It's not clear, however, how many workers would need adjustments because some may qualify for another exemption, said Meredith Dante, an attorney with Ballard Spahr in Philadelphia.

The DOL estimates that about 200,000 workers would become overtime-eligible because of the increased salary threshold for highly compensated employees.

Employers with jobs that are solely reliant on this exemption will have a tough decision to make, Passantino noted. "Paying overtime on $125,000 per year is a huge economic burden, but it still may be less expensive than going to the new level."

Employers should note that this is only a proposed rule. "We will not see a final rule until well after the close of the public notice and comment period, and we likely will not see a final rule until 2020," said Brett Coburn, an attorney with Alston & Bird in Atlanta.

The proposed threshold represents the 90th percentile of full-time salaried workers nationally, projected forward to 2020.

Special Rule

Workers who meet the highly compensated threshold don't automatically qualify for exempt status. Under the Fair Labor Standards Act, employees must earn 1 1/2 times their regular rate of pay for hours worked beyond 40 in a workweek unless they fall under an exemption. For the executive, administrative and professional—so-called white-collar—exemptions, employees must perform certain duties and earn a minimum salary. Currently, the salary threshold is $455 a week ($23,660 annualized) and the DOL is seeking to raise it to $679 a week ($35,308 annualized).

Under a special rule, employees whose total compensation is currently at least $100,000 a year ($147,414 under the proposal) are considered highly compensated employees and are eligible for exempt status if they meet a reduced duties test as follows:

  • 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.

Under the executive exemption, for example, an 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. 

So highly compensated employees may qualify for exempt status if, for instance, they direct the day-to-day work of two or more other employees but do not participate in the decision to hire or fire workers.

Under the highly compensated exemption, a worker's total annual earnings may include commissions, nondiscretionary bonuses and other nondiscretionary compensation. However, the employee must earn a weekly salary or fee of at least the regular white-collar threshold ($455 for now and $679 if the DOL's proposal is finalized). Employers can't count credit for lodging, payments for medical or life insurance, or contributions to retirement plans as part of the total annual compensation.

Critical Evaluation

To prepare for a change to the highly compensated exemption, employers will need to identify which workers in this category are earning less than the proposed increase.

First, determine whether an employee meets all of the duties under another exemption, said Alex Stevens, an attorney with McGinnis Lochridge in Dallas. If so, the employer may not need to make any substantial changes, because the worker will simply need to be reclassified as an exempt executive, administrative or professional employee.

[SHRM members-only resource: FLSA Proposed Salary Increase: Impact Analysis Guide and Calculator]

"If the employee does not meet those tests, then the employer needs to take a hard look and determine whether the employee customarily and regularly performs one or more of the exempt duties," Passantino said. "At that point, the employer can turn to the compensation issue to ensure that the new standard will be met."

Coburn noted that employers have three main options:

  • Increase the employee's salary to meet the new threshold.
  • Change the employee's job duties to allow him or her to comfortably meet all of the duties requirements of one of the regular white-collar exemptions.
  • Reclassify the employee to nonexempt and pay overtime premiums. 

"Because of the high dollar amounts we are talking about, these changes could have a meaningful impact on employer compensation budgets, so it is a good idea to start getting ahead of this issue and planning for changes in 2020," Coburn said.

But employers shouldn't make any changes yet. "We still need to wait and see what the final threshold will be," he said.

Check State Law

Some states—such as California, New York and Pennsylvania—don't recognize the exemption for highly compensated employees. Businesses in those states must structure exempt jobs in a way that fully satisfies all of a white-collar exemption's duties. So, a new salary threshold shouldn't really change anything for those employers, Dante noted.

Additionally, employers in California and New York already must comply with higher salary thresholds than the DOL's $35,308 proposal for the regular white-collar exemptions.

"With the increased national focus on pay equity and living wages … I wouldn't be surprised to see more states increase the threshold," Dante said.

[Visit SHRM's resource page on FLSA exemption classification.]



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