On March 7, 2019, the U.S. Department of Labor (“DOL”) published a proposal for revisions to the “white collar” or executive, administrative and professional (EAP”) exemptions from the overtime provisions of the Fair Labor Standards Act (“FLSA”). The notice of proposed rulemaking sets two new salary thresholds: an EAP threshold and a highly compensated employee (“HCE”) exemption. This article will focus on the proposed increase in the HCE salary threshold from $100,000 to $147,414. This threshold is approximately the 90th percentile of the earnings distribution of full-time, non-hourly workers in the entire U.S.
Employees who earn more than the HCE threshold have to pass a “minimal” duty test to be exempt from FLSA overtime requirements. They are exempt if they customarily and regularly perform just one of the duties of an exempt executive, administrative, or professional employee specified in the full EAP duties test. Alternatively, white collar employees earnings less than the HCE threshold are subject to the full EAP duties test. The new law would make employees earning between $100,000 and $147,414 no longer termed “highly compensated” and so they would need to pass all of the components of the duties test in the FLSA to qualify for exempt status beginning in year 2020. This newly proposed rule also specifies that the DOL will seek increases to the HCE salary threshold every four years and suggests future HCE thresholds will be linked to the 90th percentile of the earnings distribution.
1. Employees Affected if the New Regulation Takes Effect
Based on Current Population Survey (“CPS”) data from 2018, there are approximately 6 million “white collar” employees whose earnings exceed the existing $100,000 HCE threshold, but do not earn enough to exceed the proposed HCE threshold of $147,414. Approximately 70% of these employees are employed in occupations exempt from overtime for reasons such as education or the DOL believing they will pass the full EAP test.
However, occupations such as management analysts, food service managers, financial analysts, insurance sales agents, claims adjusters, credit counselors, appraiser, and etc., which account for more than half of the remaining 1.8 million employees, will no longer be considered highly compensated and so will become subject to a more stringent EAP duties test. Their duties may not qualify for FLSA exemptions and will likely be subject to overtime requirements under federal law.
Many of the affected jobs are found in most if not all industries. Almost all employers have some type of first-line supervisors and many have a human resources department. As a result, employers with exempt workers in the affected salary range should be reviewed closely. Potential exposure for misclassification and owing overtime is high for high wage employees. The risk for high potential exposure is based in part on the fact that many employers do not track work time for high wage earners which means employers could find themselves with little means of a defense against claims of unpaid overtime.
The largest group of employees which fall in this category are the first-line supervisors which is a broad range of employees. Supervisors of sales workers make up the largest group. The DOL believes these employees have between a 50% and 90% chance of passing the EAP duties test. On the other hand, the DOL assumes that first-line supervisors of construction trades and extraction workers, housekeeping and janitorial workers, farming, fishing, and forestry workers, and personal service workers have less than a 10% chance of passing the EAP duties test. The DOL believes sales representatives in wholesale, manufacturing and services, compliance officers, real estate brokers and sales agents, customer service representatives, and food service managers have less than a 50% chance of passing the EAP duties test.
Several of the positions are in professional services where it is challenging to describe and document employees’ daily activities. These positions can also have a wide mix of responsibilities and functions within the same job title. It may take additional effort to confirm these employees pass the EAP duties test and ensure sufficient documentation is maintained.
2. The HCE Threshold Will Grow
The $147,414 threshold represents the DOL’s projection for the 90th percentile of the earnings distribution in 2020. However, that amount assumes an annual growth rate of 2.24% for the 2.5 years from mid-2017 to January 2020. There are several reasons why the HCE threshold will grow much faster than the DOL has indicated: 1) The DOL understated previous growth in the 90th percentile; 2) Growth at the top percentile of the earnings distribution is accelerating; and 3) If the proposed rules are enacted, it will cause the lowest paid exempt workers to be reclassified as nonexempt (this will further accelerate the growth in the 90th percentile of the non-hourly earnings distribution).
Employers with FLSA exempt employees who earn between $100,000 and $147,414 should carefully review whether those employees would pass the stricter EAP duties test rather than the minimal HCE duties test and, if so, ensure sufficient documentation is maintained. The potential exposure can be extremely expensive so it is of utmost importance to be in compliance with any new regulations regarding exempt employees.