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December 9, 2019

Stroock Special Bulletin

By: Howard S. Lavin, Elizabeth E. DiMichele

Effective January 1, 2020, the salary threshold for employees to be classified as exempt from the minimum wage[1] and overtime requirements of the federal Fair Labor Standards Act (the “FLSA”) increases as part of the final overtime regulations issued by the U.S. Department of Labor (the “Department” or “DOL”). Under the new DOL rules, the minimum salary for exempt status would increase from $455 per week ($23,660 annually) to $684 per week ($35,568 annually). This means that employees who make less than $35,568 per year would be automatically eligible for overtime in the amount of one and one-half times their regular hourly rate for all hours worked in excess of 40 in a workweek. The DOL estimates that increasing the salary threshold will make about 1.3 million additional workers eligible for overtime. Alternatively, employers can increase the salaries paid to exempt employees who currently earn at least $455 per week but less than $684 per week.

The Federal Regulations

Bona fide executive, administrative or professional employees are exempt from the overtime requirements of the FLSA. Generally, there is a three-part test to determine exempt status:

  • the employee must be paid on a salary basis (the “salary basis test”);
  • the employee must be paid at least the minimum salary level (the “salary level test”); and
  • the employee must perform executive, administrative or professional capacity duties as established by the regulations (the “duties test”).

The salary basis test requires that to be considered exempt, an employee generally must be salaried.[2] Employees are salaried under the regulations if they regularly receive a predetermined amount of compensation that is not subject to reduction because of variations in the quality or quantity of work they perform. With limited exceptions, employees must receive their full salary for any week in which they perform any work, without regard to the number of days or hours worked.

If an employee satisfies the salary basis and salary level criteria, the final question is whether the employee performs executive, administrative or professional duties as established by the FLSA regulations.

The District Court’s Decision

These regulations replace the Obama-era 2016 final rule that had raised the minimum salary for exempt status to $913 per week ($47,476 per year), which was invalidated by the U.S. District Court for the Eastern District of Texas.[3] The district court ruled that the $913 per week salary level was too high, thereby capturing  many individuals who perform exempt duties and should be exempt from overtime. The court explained that the law establishing the exemptions clearly provides that the primary test for establishing exempt status is the duties test, and not the salary level test. The district court added the salary level was only supposed to set the “floor to screen out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary.”[4]

The New Rules

In addition to increasing the basic salary threshold from $455 per week to $684 per week, the Department raised the minimum salary to qualify for the streamlined duties test for highly compensated employees. For highly compensated employees, the DOL new rules raised the salary threshold from its current level of $100,000 per year to $107,432. This compensation level equals the earnings of the 80th percentile of full-time salaried workers nationally, but is approximately $40,000 lower than the Trump DOL’s March 2019 proposed rule. Under the highly compensated employee exemption, individuals who customarily perform only one of the exempt duties of an executive, administrative or professional employee are deemed exempt, provided that their salary meets or exceeds the minimum highly compensated employee threshold.

In an effort to align its regulations with current pay practices, the new rules permit employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the standard salary test requirement, provided that those payments are made annually or more frequently. This is substantially similar to the 2016 final rule; however, the 2016 version required that such bonuses be paid at least quarterly to count toward the salary level. Examples include nondiscretionary incentive bonuses tied to productivity or profitability (e.g., a bonus based on the specified percentage of the profits generated by a business in the prior year).

If an employee does not earn enough in nondiscretionary bonuses and incentive payments, including commissions, in a given 52-week period to retain his or her exempt status, the DOL permits a “catch-up” payment at the end of the 52-week period. The employer has one pay period to make up for the shortfall (up to 10% of the standard salary level for the preceding 52-week period). This catch-up payment will count only toward the prior 52-week period’s salary amount and not toward the salary amount in the 52-week period in which it is paid. If the employer chooses not to make the catch-up payment, then the employee would be entitled to overtime pay for any overtime hours worked during the previous 52-week period.

To satisfy the highly compensated employee exemption under the final rule, employers must pay workers at least the standard weekly salary level of $684 per week, while the remainder of the total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation.

Unlike the 2016 final rule, the new DOL rules do not set automatic, periodic increases of the salary threshold. In its place, the DOL states that it intends to more regularly update the salary level through notice-and- comment rulemaking.

The final rule does not seek to change the current duties test. A substantial amount of wage and hour litigation over exempt status turns on whether the individual satisfies the duties test, a fact-specific analysis. As a result, some had hoped that the new rules would update and simplify the duties test.

New York Regulation

New York employers are reminded that the New York State Department of Labor (“NYSDOL”) already has adopted regulations that increased the salary threshold for exempt employees in New York.[5] Depending on the size and location of the employer within New York State, the NYSDOL regulations increase the minimum salary threshold, as follows:

  • New York City large employer (11 or more): $1,125.00 per week ($58,500 annually);
  • New York City small employer (10 or fewer): $1,012.50 per week ($52,650 annually); and $1,125.00 per week on and after December 31, 2019;
  • Nassau, Suffolk and Westchester employers: $900.00 per week ($46,800 annually); $975.00 per week on and after December 31, 2019; $1,050.00 per week on and after December 31, 2020; and $1,125.00 per week on and after December 31, 2021;
  • All other New York employers: $832.00 per week ($43,264 annually); $885.00 per week on and after December 31, 2019; and $937.50 per week on and after December 31, 2020.

Impact for Employers

The threshold salary levels currently in New York are higher than those promulgated by the DOL under the FLSA. Although New York employers should continue to monitor the FLSA regulations, New York-based employers — regardless of size and location — currently meeting the applicable state standard will satisfy the salary level test adopted by the DOL. Employers doing business in different states will need to check federal, state and local requirements to ensure compliance. In addition, New York employers who do business in different counties will have to apply different salary thresholds, depending on the location and number of employees.

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For More Information:

Howard S. Lavin

Elizabeth E. DiMichele

This article is for general information purposes only. It is not intended as legal advice, and you should not consider it as such.

[1] Currently, the federal minimum wage is $7.25 per hour. In July 2019, the House of Representatives passed a bill (231-199) which would gradually increase the federal minimum wage to $15 per hour by 2025. This bill, which was advanced by Democrats and  passed largely along party lines, will not, according to Republican Senate Majority Leader Mitch McConnell, be considered by the Republican-controlled Senate.

In New York State, the minimum wage is substantially higher. The minimum wage varies based on the size and location of the employer within New York State:

Location 12/31/18 12/31/19 12/31/20 2021*
NYC - Large Employers (of 11 or more) $15.00
NYC - Small Employers (10 or less) $13.50 $15.00
Nassau, Suffolk and Westchester Counties $12.00 $13.00 $14.00 $15.00
Remainder of New York State $11.10 $11.80 $12.50 *

 

[2] Under certain circumstances, administrative and professional employees may be paid on a “fee basis.”

[3] Nevada v. United States Department of Labor, Civ. Action No. 4:16-CV-731, 2017 WL 3837230 (E.D. Tx. Aug. 31, 2017).

[4] Id., at 8.

[5] 12 NYCRR §#142-3.12(c)(2)(i)(e).