As we predicted yesterday, the U.S. Department of Labor (“DOL”) has now officially proposed a rule to increase the minimum salary that needs to be paid to an exempt executive, administrative, or professional employee to $679 per week ($35,308 per year). This represents a significant increase from the current salary threshold of $455 per week (or $23,660 per year) for exemption.
Interestingly, the DOL proposed no changes to the duties portion of the exemption test.
As you may remember, a 2016 rule would have increased the weekly salary requirement to $913 per week (or $47,476 per year). However, this rule was invalidated in 2017 by a federal judge in Texas on the grounds that the DOL exceeded their authority in raising the threshold so high.
The new rule has only been proposed – it is not final. A final rule will be issued only after the DOL has received and reviewed comments from various stakeholders, and the DOL may make some changes to the rule before it is finalized.
Nondiscretionary Bonuses and Commissions are Included
The new proposal also allows nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis to be used to satisfy up to 10% of the standard salary level. This is a holdover from the 2016 proposed rules but the new proposal permits annual bonuses to be included – the 2016 rules only applied to nondiscretionary bonuses and commissions paid on a quarterly (or more frequent)basis.
The rule also allows for a “catch up payment” at the end of the year. Thus, an employer may pay an exempt employee 90% of the standard salary level and then, if at year’s end the salary, nondiscretionary bonuses and incentive payments (including commissions) do not equal the minimum salary level for exemption ($35,308), the employer would have one pay period to make up for the shortfall by paying up to 10% of the annual amount. This might prove valuable for employees whose commission payments fall short of the anticipated amount such that their exempt status is jeopardized without this one-time payment
Importantly, any such catch-up payment would count only toward the prior year’s salary amount and not toward the salary amount in the year in which it was actually paid.
Highly-Compensated Employee Exemption Increased
Under the current Highly-Compensated Employee Exemption, employees are exempt if they earn at least $100,000 and customarily and regularly perform one or more of the exempt duties of an executive, administrative, or professional employee.
Under the proposed rule, such employees must earn at least $147,414 per year, of which $679 must be paid weekly on a salary or fee basis. The proposed rule would not permit employers to use nondiscretionary bonuses to meet the required $679 weekly salary for highly compensated workers.
Review Salary Threshold Every 4 Years
Finally, the DOL has indicated that it intends to propose updates to the salary and compensation levels every 4 years to ensure that these levels continue to provide useful tests for exemption. This differs from the 2016 proposal that included an automatic annual increase.
Remember, this rule is not yet final and as we explained in our article entitled Labor Department Ready to Roll Out New Salary Test For Overtime Exemption we anticipate a great deal of public comment and perhaps litigation from both sides of the spectrum.
Nevertheless, employers can expect the salary level to go up and should begin strategizing for an increase in the range of this new proposal.