Proposed Changes to Overtime Regs Lead List of Wage and Hour Issues to Watch

In March 2019, the U.S. Department of Labor (DOL) announced two proposed rules that would affect overtime. The first rule would change the requirements for classifying employees as exempt from receiving overtime pay. If adopted, the rule is projected to make more than a million additional workers eligible for overtime. The second rule would clarify and update how to calculate the “regular rate of pay” for providing overtime to nonexempt employees. The regulations governing the calculation of the regular rate haven’t been changed in more than 50 years.

Proposed Changes to Salary Threshold Rule

The federal Fair Labor Standards Act (FLSA) requires the payment of overtime to employees for hours worked over 40 in a workweek unless they’re exempt. To be exempt (and not eligible for overtime), an employee must perform executive, administrative, or professional job duties and be paid on a salary basis at or above a minimum required salary threshold. Currently, the salary threshold requires the payment of at least $455 weekly or $23,660 annually to be exempt from the FLSA overtime requirements. The amount was set in 2004.

You may recall that in March 2014, President Barack Obama directed the secretary of labor to update the overtime regulations. Two months later, the DOL issued a rule that would have raised the minimum salary threshold to $47,476 per year, with automatic adjustments every three years. Shortly before the regulation was to go into effect, however, a federal district court in Texas declared the rule invalid and blocked its enforcement. The DOL appealed the decision to a circuit court of appeals in the 5th Circuit, but the appeal has been held in abeyance pending further agency rulemaking about a revised salary threshold.

That brings us to 2019. On March 22, the DOL published a notice of proposed rulemaking rescinding the rule from 2016 and unveiling a new regulation instead. The proposed new rule:

• Raises the minimum salary threshold from $455 per week ($23,660 per year) to $679 per week ($35,308 per year);
• Allows employers to include certain nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new $679 per week salary threshold; and
• Raises the total annual compensation required for individuals in the “highly compensated employee” exemption (subject to a minimum duties test) from $100,000 to $147,414.

Unlike the 2016 rule, the new proposed regulation contains no automatic adjustments to the salary threshold. Instead, there is a commitment to periodic review, but any change in the threshold would require notice-and-comment rulemaking.

Proposed Changes to Regular Rate Rule

The FLSA requires overtime payments to be made to nonexempt employees at “time and one-half” or, more specifically, at one and one-half times an employee’s “regular rate” of pay. The regular rate doesn’t always mean simply one and one-half times an employee’s hourly rate of pay. The regular rate includes all remuneration for employment—including certain payments such as nondiscretionary bonuses, commissions, and shift differentials—divided by the total number of hours worked in a workweek. Only payments specifically excluded by law may be left out of the regular rate calculation.

The DOL’s proposed rule seeks to clarify certain kinds of payments that may be excluded from the regular rate, taking into account more up-to-date workplace pay practices. The rule proposes clarifications to confirm that employers may exclude the following items from the regular rate:

• The cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods and services;
• Payments for unused paid leave, including paid sick leave;
• Reimbursed expenses, even if they weren’t incurred “solely” for the employer’s benefit;
• Reimbursed travel expenses that don’t exceed the maximum travel reimbursement under the Federal Travel Regulation System and that satisfy other regulatory requirements;
• Discretionary bonuses (with additional examples of what is and isn’t a discretionary bonus);
• Benefit plans, including accident, unemployment, and legal services; and
• Tuition programs, such as reimbursement programs or repayment of educational debt.

Calculating the regular rate has traditionally presented employers with a challenge in terms of legal compliance and has been the subject of wage and hour litigation. The comment period for the proposed regular rate rule ended on May 28, 2019.

Bottom Line

At this point, both rules are merely proposed, and the comment period for employers to provide input just recently closed. If any changes are adopted, they wouldn’t become effective until after the publication of a final rule. The timing of any changes is the subject of further speculation, with some anticipating they could be implemented as soon as the fourth quarter of 2019, but that doesn’t include time for any litigation that may affect the rules’ implementation.

In the meantime, you may want to consider auditing your employees currently classified as exempt to ensure they meet the duties test. For those who do, you also may want to look ahead at whether it makes financial sense to potentially increase their salary level (or bonus and incentive payments) to meet a new threshold or, alternatively, to convert them to nonexempt and overtime-eligible status.