- Final Rule on White-Collar Exemptions under the FLSA – What You and Your Business Need to Know
The Department of Labor (DOL) issued its final rule on September 24, 2019, updating the minimum salary requirements for the white-collar overtime exemptions delineated under the Fair Labor Standards Act (FLSA). Earlier this year, we provided an update on the DOL’s proposed rule changes, which were first released on March 22, 2019. The DOL’s 2019 proposed changes were not as stark the Obama-era rule issued in 2016, which was subsequently declared unconstitutional. The 2019 proposal, nevertheless, suggested raising the salary thresholds appreciably. The final rule, which will become effective as of January 1, 2020, closely tracks the proposal from March. Here is a comprehensive summary of the changes employers must know as they usher in the New Year. The new rule contains three major changes of which employers must be aware.
First, the new rule will increase the minimum salary requirement for white-collar exemptions from $455 per week, and $23,660 annually, to $684 per week and $35,568 annually. The increases are nearly identical to the increases published under the proposed rule in March; however, the new salary thresholds remain substantially less than the 2016 modifications (which increased minimum salary requirements to $913 per week, and $47,476 annually).
The 2016 rule change provided for automatic increases of the salary threshold every three years. The proposed rule from March 2019 required that recommended updates to the minimum salary requirement be submitted every four years. The final rule that will take effect in January 2020 contains no mandated updates or required review of the salary thresholds. This offers employers a level of certainty that the proposed rule lacked. To increase the minimum salary requirements in the future, the DOL must make a new determination and submit the proposed changes through the standard notice and comment rulemaking process.
Second, the DOL’s new rule will increase the total annual compensation threshold under the FLSA’s exemption for a “highly compensated employee” from $100,000 to $107,432. This is one of the more dramatic changes from the proposed rule published in March, which set the annual compensation threshold for this exemption at $147,414. The annual compensation threshold under the final rule remains much closer to the current level. Pennsylvania employers should note that the “highly compensated employee” exemption is unique to the FLSA and shares no parallel exemption under the Pennsylvania Minimum Wage Act (PMWA). The more modest increase in the final rule will keep this exemption viable and important.
Third, like the proposed rule, the DOL’s final rule allows employers to satisfy ten percent (10%) of the minimum salary requirement with non-discretionary bonuses, incentives and commissions (which may be paid on an annual basis). Before January 2020, employers must decide how they intend to comply with the new rule and the increased salary thresholds. This rule change offers employers another arrow in their quiver. In short, it affords employers a higher degree of flexibility in assessing how best to meet the minimum salary requirements for certain employees.
- Final Regulation Issued on Pennsylvania’s Wage and Hour Laws – Independent Regulatory Review Commission (IRRC) to Hold Public Meeting in November
In Pennsylvania, employers must comply with the regulations under both the FLSA and the Pennsylvania Minimum Wage Act (PMWA). The PMWA is this Commonwealth’s analog to the FLSA. Both laws impose minimum wage and overtime standards upon employers. Employers must ensure compliance with both laws, which often becomes cumbersome and confusing – especially when the state and the federal regulations diverge.
In the beginning of the year, we offered a full analysis of the proposed changes to Pennsylvania’s white-collar overtime exemptions released by the Pennsylvania Department of Labor Industry (DLI). By 2022, The DLI’s rule change would increase the salary threshold from $250 per week, and $13,000 annually to $921 per week and $47,892 annually. These increases harken back to the 2016 Obama-era increases, which were determined unconstitutional. The proposal received heavy criticism, including a thoughtful critique from the Pennsylvania Independent Regulatory Review Commission (IRRC).
After more than a year following the IRRC’s initial commentary, at last, the DLI released its final regulation on October 17, 2019. The IRRC shall hold a public meeting scheduled for November 21, 2019. If the approved, the DLI’s final regulation will take effect on January 1, 2020 – the same day as its FLSA counterpart.
Despite the criticism leveled against the DLI’s proposed rule released in June 2018, the final regulation issued this month is strikingly similar. Although the minimum salary requirements were altered slightly, the DLI maintained its original structure. The salary threshold for Pennsylvania’s white-collar exemptions shall increase to an annual income of $45,500 by 2022. Specifically, the DLI’s final regulation provides for the following increases to the minimum salary requirements for exempt employees over the next three years:
- $684 per week ($35,568 annually) effective January 2020;
- $780 per week ($40,560 annually) effective January 2021;
- $875 per week ($45,500 annually) effective January 2022;
As an initial observation, the DLI’s new regulation makes compliance for 2020 more manageable for employers as both rules set identical salary thresholds for the upcoming year. The similarities largely end after 2020, however.
Unlike the new rule increasing salary thresholds under the FLSA, the DLI’s final regulation builds in systematic increases to the minimum salary requirements for exempt employees for many years to come. Beginning on January 1, 2023, the new regulation increases the salary threshold automatically to match the bottom 10th percentile for Pennsylvania’s salaried exempt employees. The final regulation requires this adjustment to occur every three years. Therefore, after every three-year period, the salary threshold slides upward to transform the lowest salaried exempt employees into non-exempt workers.
The DLI chose to include an identical provision in its final regulation to the one included in the FLSA’s final rule, which permits employers to satisfy ten percent (10%) of the salary threshold with non-discretionary bonuses, incentives and commissions (paid on an annual basis, if so desired). This allows Pennsylvania employers to retain the flexibility that the new FLSA rule affords. This will become increasingly more important as the salary threshold for the PMWA continues to increase – and increase rapidly – while the FLSA salary threshold remains stable.
Under the new regulation, the DLI also purports to make changes to the duties test for PMWA’s white-collar exemptions, specifically designed to eliminate the differences in how exemptions are applied under Pennsylvania law and the FLSA. These minor changes do not address the more substantial differences between the FLSA and the PMWA. Most noteworthy, certain routinely used exemptions – like the exemption for highly compensated employees or for certain computer and educational professional – continues to be absent from the PMWA.
What Must Employers Know
January 1, 2020 is fast approaching, and employers must be ready for the new compliance realities that these new rules will create. If no steps are taken, both rules will require employers to reclassify certain employees as non-exempt. Employers have a variety of options available that will allow them to comply with the law, while continuing to operate their businesses in the manner they choose.
Attorneys at Goldstein Law Partners are available to assist employers and employees anticipate, confront and manage the compliance challenges awaiting in 2020. We offer a full array of employment law services to help manage your business and mitigate risks, including compliance assessment and counseling, internal investigations, transactional assistance, regulatory support and litigation.
Mr. Rodgers is an associate at Goldstein Law Partners. He concentrates his practice in the areas of constitutional law and civil rights, complex litigation and employment law. As an experienced litigator, he appears before federal and state courts at both the trial and appellate levels.