Proposed overtime rule modestly increases salary threshold for white collar exempt employees

On March 7, 2019, the United States Department of Labor (DOL) issued a proposed rule to modify the Fair Labor Standards Act as it relates to the exception for overtime pay for white collar exempt employees. Once published in the Federal Register, there is a 60-day comment period before the new rule could become effective.

In 2016, the DOL planned to increase the salary threshold for those exempt from overtime pay from the present level of $23,660, set in 2004, to $47,476. At the time, the DOL anticipated the change would impact well over four million workers. By court action, the rule was preliminarily enjoined and not put into effect. On appeal, the DOL, now working under a new administration, indicated it would propose a new rule that would increase the salary threshold more modestly.

The proposed rule would:

• Increase the weekly salary threshold from $455 to $679—an annual increase from $23,660 to $35,308;
• Increase the salary threshold for the highly compensated employee from $100,000 to $147,414;
• Allow employers to pay up to 10 percent of the salary annually in nondiscretionary bonuses and incentive pay, including commissions;
• Provide for a salary threshold review every four years but not automatic increases; but
• Make no adjustments to the duties test.

There are three tests that must be met for every overtime exempt white collar employee, the salary basis test, the duties test and the salary threshold test. The salary basis test requires employees to be paid the same amount each week for any amount of work performed in that week. This is not proposed to change. The duties test varies by category—administrative, executive or professional—and is also not proposed to change. The only test changing is the salary threshold test, which would require an employee to earn at least $679 per week or $35,308 annually. The DOL expects this change to impact 1.2 million employees across the country.

To reach the proposed salary threshold working 40 hours a week, an employee’s wage rate would need to be nearly $17 per hour. By contrast, meeting the current salary threshold, an employee working 40 hours a week for 52 weeks needs to make at least $11.38 per hour. Although the federal minimum wage is $7.25 per hour, the minimum wage in many states is significantly higher. For instance, in Illinois, the minimum wage is $8.25 per hour, increasing to $9.25 per hour on January 1, 2020. An employee earning $9.25 per hour who is working 40 hours a week for 52 weeks earns only $19,240 annually. The Chicago minimum wage is $12.00 per hour, increasing to $13.00 per hour on July 1, 2019. In Cook County, the minimum wage is $11.00 per hour, increasing to $12.00 per hour on July 1, 2019. Considering these numbers, no minimum wage employee would satisfy the proposed salary threshold in Illinois. 

This proposed rule faces challenges and has its opponents, some claiming the increase in the salary threshold level is too modest while others claiming it is too steep. Regardless, by retaining the duties test, it may survive challenge in the courts. Prudent employers should prepare for an increase as the rule may become effective in this or a modified form by January 2020.

For more information on how employers may prepare for these proposed changes, contact one of Chuhak & Tecson’s 12 Employment law attorneys.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Jeralyn H. Baran, Principal