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Department of Labor Announces Final Rule Changing Salary Level Tests

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Department of Labor Announces Final Rule Changing Salary Level Tests

The U.S. Department of Labor has announced its Final Rule increasing the minimum salary level employees need to be paid in order to be deemed an exempt white collar employee, provided the employees otherwise meet the applicable duties and salary basis tests. The rule has been long-awaited since the predecessor Obama administration-era rule was enjoined by a Texas federal court in 2016. The appeal of that case has been on hold, allowing the Department time to consider a new rule that would more likely survive a legal challenge. It took nearly three years for this to happen, but the time has come. The new rule will go into effect on January 1, 2020.

The highlights are:

  • The new standard salary level will be $684 per week (or $35,568 per year), an increase from the current $455 per week (or $23,660 per year);
  • 10 percent of the standard salary level amount (i.e., $3,556) may be paid in the form of non-discretionary bonus and other incentive payments, including commissions, so long as the payments are made at least annually;
  • The new level for employees subject to the Highly Compensated Employee (HCE) rule will be $107,432 per year, an increase from the current $100,000 per year; and
  • There will be no formal structure (including CPI indexing or other review) put into place for future updates to these rules.

These changes are significantly less dramatic than those in the enjoined 2016 rules, which would have increased the standard salary level to $47,476 per year, the HCE amount to $134,004, allow for the non-discretionary bonus setoff only if paid at least quarterly, and require indexed adjustments every three years. The 2016 rule was estimated to threaten the exempt status of nearly 4.2 million employees; this new rule is estimated to impact the exempt status of 1.2 million employees.

In 2016, many employers made adjustments to their compensation programs by increasing the pay of exempt workers to retain their exempt status, modifying their job descriptions to justify the pay adjustments, or converting previously exempt employees to non-exempt. These new rules will require employers to consider these options again, but it is anticipated that the adjustment will be less burdensome and controversial. The greatest impact, however, is still expected with respect to currently exempt employees in the hospitality and retail industries.

For these reasons, the changes will likely face less opposition from employers. Many agree that the current 14-year-old level was due for an adjustment, and are relieved that the amount will not be automatically increased based on an index and that the bonus setoff—while new—is more workable than the version contained in the 2016 regulations.

These new regulations should bring the litigation over the 2016 regulations to an end. However, it is anticipated that some labor groups will try to resurrect the more employee-friendly 2016 regulations and keep that litigation alive. Time will tell, but in the meantime, employers have just over three months to evaluate their compensation programs and make sure that by January 1 they are in compliance with the new rule.