Employment Law Report
DOL Releases Final Rule Raising Minimum Salary for Exempt Workers, Doesn’t Change Duties Tests
Speculation about when the DOL would release the final rule raising the minimum salary for exempt workers has ended. Today, the DOL released the final rule that will be effective December 1, 2016. The final rule is available here.
The proposed rule was quite controversial, eliciting over 270,000 comments, mostly from employers stating the proposed raises were too extreme. The Final Rule makes several changes from the proposed rule, including adjusting the proposed amount of the salary requirements, exchanging annual increases for increases every three years, leaving the duties tests unchanged, and allowing bonuses and nondiscretionary bonuses to account for some of the salary minimums.
The DOL estimates that approximately 22.5 million wage and salary workers in the U.S. will be affected by the Final Rule, with 4.2 million workers who are currently exempt becoming eligible for overtime protections if their employers do not raise the salaries. Final Rule at pg. 9-10. The DOL estimates that “average annualized direct employer costs will total $295.1 million per year” from the Final Rule. Highlights of the Final Rule are discussed below.
How much is the salary raised? In the proposed rule, the DOL proposed setting the salary at the 40th percentile of weekly earnings of full-time salaried workers nationally, which equaled $970 per week or $50,440 a year. In the Final Rule, the DOL adjusted the proposed minimum down slightly. The Final Rule requires the minimum salary to be $913 a week, or $47,476 annually for a full-year worker. The amount equals the salary level of 40th percentile of earnings of full-time salaried workers in the lowest wage Census region (which is currently the South).
What about highly compensated employees? The proposed rule suggested setting the minimum for highly compensated employees to the 90th percentile of earnings for full time salaried workers, which was $122,148 using 2013 numbers. The Final Rule sets the highly compensated minimum to be $134,004, annually, equal to the 90th percentile of earnings of full-time workers nationally, based on the fourth quarter numbers from 2015. The DOL stated in the commentary concerning the Final Rule that it “believes that this will avoid the unintended exemption of large numbers of employees in high-wage areas—such as secretaries in New York City or Los Angeles—who are clearly not performing [exempt] duties.” Final Rule at pg. 8.
What about bonuses? The DOL asked for comments in the proposed rule about whether nondiscretionary bonuses or incentive payments should count toward the salary level. Many employers commented that they should be included, which would lessen the blow of the increased salary requirements. In the Final Rule, for the first time, employers are now permitted to “count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the required salary level for the standard exemption, so long as employers pay those amounts on a quarterly or more frequent basis.” Final Rule at pg. 8-9.
What about automatic updates to the salary? In the proposed rule, the DOL suggested annual updates to both the minimum salary and the salary for highly compensated employees. In the Final Rule, the salary minimums will be updated every three years as opposed to every year as proposed. The first update will occur on January 1, 2020, where it is projected that the minimum will likely be $984 a week or $51,168 per year, based on historical wage growth in the South, and the highly compensated employee’s requirement will likely be $147,524. The mechanism for the adjustment is “the same methodology used in this rulemaking to set the initial salary level—the 40th percentile of earnings of full-time salaried workers in the country’s lowest-wage Census Region.” Final Rule pg. 178-89.
What about employees who were previously excluded from the salary basis test? The Final Rule makes no changes to the exemptions from the salary basis test for those employees who previously did not have to satisfy the salary minimum, for example teachers, doctors, and lawyers, as well as those employees that qualified for the outside sales representatives exemption. As a result, the raised salary minimums do not apply to those employees.
Duties tests left alone…for now. While the proposed rule did not propose any updates to the duties tests, the DOL did ask for comments concerning the tests. Commentators feared that the duties tests would be revised (without notice and comment) based on some statements by the Solicitor of Labor at a labor conference. However, in the Final Rule, the DOL did not change the duties test. The DOL posited that raising the minimum salary will decrease the amount of workers who objectively do not meet the minimum salary requirements and who subjectively do not meet the duties tests either.
Can the Final Rule be challenged? Under the Congressional Review Act, Congress has 60 days to consider the rule and will have the opportunity to invalidate the rule. The next step would be the President vetoing the resolution, but then Congress could bypass the veto with a 2/3 vote. See here.
What should companies do to implement the rule?
- Identify exempt employees whose salaries will fall below the new minimum.
- Decide whether to increase those workers’ salaries to maintain the exemption or convert them to nonexempt status.
- If an employee is converted to nonexempt status, implement changes attendant to the employee’s new status, such as keeping time records (newly nonexempt employees may need training on writing down all compensable time), providing lunch and rest breaks, and paying overtime.
- Evaluate and update job descriptions.
- Review and update off-the-clock work policies. Consider implementing a policy regarding afterhours use of mobile devices for work-related purposes.
- Review and update overtime policies. Consider including language encouraging employees to promptly report any error in overtime pay calculations.
- Evaluate and update time tracking systems.
- Establish a procedure to keep track of the new minimum salary level as it increases every three years.
- Consider employing legal counsel to conduct a wage and hour audit.
- Budget for the upcoming changes now.
The DOL released helpful questions and answers on their website, available here.
Where to go for questions? Companies are wise to consult counsel experienced in wage and hour issues to assist in planning and implementation of the Final Rule. Our team is ready to assist you and to answer any questions you may have concerning the Final Rule.