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Labor Department Tries Again on Salary Threshold

by Joe Schmitt and David James

In March, the Department of Labor announced its latest proposed rulemaking regarding the salary threshold for exemption from overtime. If you haven’t kept up with the status of the rule since changes were proposed in 2016, you are not alone. We’ll start with a quick review.

To pay an employee a salary without overtime, the employee must:

(1) meet a salary threshold

(2) be paid on a salary basis, and 

(3) perform certain white-collar job duties

In 2016, the DOL announced it intended to restrict this test and reduce the number of employees eligible for exempt status. In particular, the DOL sought to raise the salary threshold from under $24,000 a year to $47,476 a year. This would mean that an employee earning a regular salary of less than $47,476 could not be treated as exempt from overtime, regardless of his or her job duties—management, administrative, or otherwise.  

Just days before the new rule became effective, a Texas federal district court judge entered a nationwide injunction blocking the DOL from implementing the rule. This meant that the salary threshold did not go into effect while it remained tied up in the courts. The Texas court concluded that Congress gave the DOL the discretion to define the duties that qualify employees for white-collar exemptions but not to increase the salaries for these exemptions to the level set in the new rule. Basically, the court found that the DOL did not have the power to increase the salary threshold as much as it did.

The DOL ceased its efforts to implement the old rule, and turned its attention to developing a new proposal, which brings us to today.

This time, the DOL is proposing a more modest threshold of $679 a week ($35,308 annually). This figure is based on the 20th percentile full-time income in the lowest-income region (the South). Notably, this is the same metric the DOL used in 2004 to set the current threshold, which gives the new rule a greater chance of withstanding judicial scrutiny.

The DOL anticipates making the new rule effective on the first day of 2020, though that appears flexible. In the meantime, the proposed rule will undergo a notice-and-comment period and almost certainly renewed legal challenges. However, by relying on the principles guiding the 2004 rule and reducing the 2016 proposed increase by about 50 percent, this rule stands a good chance to avoid the fate of the 2016 version.

Even though we do not have the final regulations, we have enough of a sense of what DOL plans to do that we recommend companies start preparing for this change. In particular, as you turn to your projected labor budget for 2020, keep in mind that you may have salaried employees who will either need to convert to hourly employees or receive a raise (possibly a substantial one) in order to meet or exceed the new salary threshold.  

We will continue to monitor these developments closely. As always, please let us know if we can be of assistance as you assess the impact of the DOL rule on your business. 

David James and Joe Schmitt are shareholders in the labor-and-employment group at Nilan Johnson Lewis. Association members are entitled to no-cost, 60-minute consultations with James and Schmitt. The benefit renews with each legal question. Call the firm at (612) 305-7500.