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The Proposed Revised Overtime Rules

By Erica S. Chase AND Anthony P. Curatola
July 1, 2019
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The Department of Labor has issued proposed regulations that would increase the number of employees in the U.S. who qualify for overtime.

 

The U.S. Department of Labor (DOL), whose mission in part is to foster, promote, and develop the welfare of wage earners, issued a proposed regulation that contains updated salary thresholds that reflect the historical growth in wages and salaries issued on March 22, 2019 (84 Federal Register 10900). The exemption threshold for overtime pay is proposed to be raised to $679 weekly, which is $35,308 annually (currently $455 weekly, which is $23,660 annually) and to $147,414 per year for highly compensated employees, or HCEs (currently $100,000 per year). These new amounts would go into effect after publication of the final rule, which could be as early as January 1, 2020.

 

EVOLVING REGULATIONS

 

In 2016, the DOL released final regulations, “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees,” increasing the salary threshold used to determine who is exempted from the overtime rule. Those rules were challenged in court, however, and the U.S. District Court for the Eastern District of Texas issued a preliminary injunction in 2016 stopping the enforcement of the final rule pending further review. In 2017, the court granted summary judgment against the DOL, declaring the changes to be invalid because the salary level in the final rules exceeded the DOL’s authority given by Congress.

 

The court determined that the DOL’s salary level excludes from exemption an unusually high number of employees who were employed in a bona fide executive, administrative, or professional capacity. An appeal to the decision was suspended by the Fifth Circuit until new regulations were issued regarding a revised salary threshold. Now, three years later, the DOL has finally released the new proposed regulation. The updated salary thresholds (lower than those attempted in 2016) reflect the historical growth in wages and salaries.

 

The DOL’s Wage and Hour Division (WHD) enforces the Fair Labor Standards Act (FLSA), which establishes minimum wage, overtime pay, record-keeping, and youth employment standards, affecting employees in the private sector and in federal, state, and local governments. It should be noted that the FLSA doesn’t preempt any stricter state law or local standards; the higher standard applies per 29 U.S.C. §218.

 

Covered nonexempt workers are currently entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009. According to the WHD as of March 29, 2019, most states have a minimum wage that exceeds $7.25; five states have no minimum wage; and the other states have a minimum wage of $7.25. Overtime pay at a rate not less than one and one-half times the regular rate of pay is generally required after 40 hours of work in a workweek unless the worker is exempt under the FLSA rules.

 

EXEMPT WORKERS

 

There are three tests that qualify an employer to treat an employee as exempt from the overtime pay requirement: salary basis, salary level, and job duties.

 

  • The salary-basis test is satisfied if an employee is paid a fixed salary that isn’t reduced because of variations in quality or quantity of work.
  • The salary-level test sets a threshold salary level that’s either met or not met. Presently, an employee is exempt from the mandatory overtime if his or her salary level is $455 per week (or $23,660 annually). For HCEs, the current exempt level is $100,000. Under the proposed regulations, the minimum salary-level test would increase to $679 per week ($35,308 per year) and to $147,414 per year for HCEs. This change, once finalized, will result in more white-collar employees becoming eligible for overtime unless some action is taken by the company.
  • The job-duties test refers to the employee’s job duties and must primarily involve executive, administrative, or professional duties.

 

The DOL also provided in the proposed rules some wiggle room for employers to satisfy the salary-level test to align the regulations better with modern pay practices. That is, employers can include up to 10% of the standard salary requirement (i.e., up to $3,530.80, which is 10% of $35,308) with nondiscretionary bonuses or incentive payments (including commissions), but only if the amounts are paid annually or more frequently. This special provision doesn’t permit employers to use nondiscretionary bonuses to satisfy the weekly standard salary level requirement for HCEs.

 

EXCLUDED OCCUPATIONS

 

The current regulations provide that an employer can treat employees as exempt from the mandatory overtime payment if they fall into an excluded occupation. Teachers, academic administrative personnel (if they’re paid on a salary basis equivalent to an entry-level teacher in their institution), physicians, lawyers, judges, and outside sales workers are named occupations and thus not subject to the salary-level or salary-basis tests.

 

The definitions of those occupations are expanded in subparts D (Professional Employees), E (Computer Employees), and F (Outside Sales Employees) of 29 CFR §541. For example, 29 CFR §541.304(b) expands on the term “physicians” to include medical doctors, general practitioners, specialists, osteopathic physicians, podiatrists, dentists, and optometrists.

 

The proposed regulations also have no effect on overtime protections for employees in certain occupations, such as police officers, firefighters, paramedics, nurses, and laborers, and would make no changes to the job-duties tests.

 

Finally, under the proposed rules, there would be no changes to the alternative compensation minimums for academic administrative employees and computer employees that are subject to special contingent earning thresholds.

 

The threshold amounts in the proposed regulations are fixed. They aren’t adjusted annually for cost-of-living changes. But the DOL states that it is committed to periodic review and updating of the amounts through the rulemaking process since Congress has instructed the DOL to define and delimit the overtime and minimum wage exemptions “from time to time.”

 

POTENTIAL IMPACTS

 

The DOL has estimated that the increased dollar amount would cause approximately 1.3 million additional employees to qualify for overtime pay. The indirect effects from this proposed legislation may include companies incurring significant payroll, accounting, and legal costs to comply as well as reporting lower profits. There may be increased layoffs, and salaries may increase as companies move employees back into exempt status. And currently exempt (i.e., salaried) employees may be reclassified as hourly workers to maintain current salary levels and restrict overtime hours, resulting in limited work hours. This could lead to reduced pay and fewer opportunities for career advancement.

 

The proposed regulations don’t include any provisions directly regulating retirement plans. But they may have some indirect effects if adopted. For example, higher salaries from additional overtime pay may result in higher contributions to qualified plans for those companies including overtime in the contribution calculation.

 

But this is a proposed regulation that hasn’t been finalized yet. Employees and employers need to watch and see when and if the proposed regulations are finalized and then seek qualified tax and regulatory advice before acting.

 

© 2019 A.P. Curatola

Erica S. Chase is the Vertex Fellow at Drexel University’s LeBow College of Business in Philadelphia, Pa. You can reach her at erica.chase@drexel.edu.
Anthony P. Curatola is editor of the Taxes column for Strategic Finance; the Joseph F. Ford Professor of Accounting at Drexel University in Philadelphia, Pa.; and a member of IMA’s Greater Philadelphia Chapter. You can reach Tony at (215) 895-1453 or curatola@drexel.edu.
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