March 20, 2019

The DOL announces proposed changes to its overtime rule

The anticipation is over – the proposed rule would increase the standard salary threshold. Here, Ceridian’s product counsel Adam Wysopal explains what employers need to know.

On March 7, 2019, the U.S. Department of Labor (“DOL”) issued a notice of a proposed rulemaking to revise its existing overtime rule. We have been eagerly awaiting this rulemaking, and have previously written about this topic in June 2017, September 2017, and December 2017.

Background: how we got here

Before discussing the proposal, let’s refresh our memories of how we got to this point. In 2004, the Bush-era overtime rule went into effect. This rule replaced the “long” and “short” duties tests with a single “standard” duties test, which simplified and modernized the criteria that an employer uses to help determine if an employee is exempt from overtime. This rule also established a standard salary threshold of $455 per week or $23,660 per year. Under the 2004 rule, if an employee satisfies the duties test and earns at least the standard salary, then they would be exempt from overtime. The 2004 rule also created the highly compensated employee (“HCE”) test that exempts certain employees from overtime if they earn an annual salary of $100,000 or more and meet a more streamlined version of the standard duties test.

In May 2016, a final overtime rule was issued under the Obama administration. The updated rule would have increased the standard salary threshold to $913 per week or $47,476 annually, among other substantive changes. However, a U.S. district court blocked the updated Obama-era rule from taking effect in November 2016. The same U.S. district court subsequently declared the 2016 rule invalid in August 2017.

Meanwhile, the Trump-era DOL began exploring ways to revise the overtime rule while still enforcing the 2004 version.

Details of the latest proposal

The proposed rule follows the 2004-era framework closely and reuses the same methodology to determine the standard salary threshold. Only a few elements from the 2016-era rule have been preserved. The current DOL sees benefits with this approach because the 2004-era framework is well understood, and this approach may minimize the uncertainty and potential of future legal pitfalls.

To come up with an updated standard salary threshold, the DOL studied the methodologies that have been used in the past. The Department found that the 2004-era methodology was generally consistent with past practices and should be used again. Applying current data to the 2004 methodology results in a weekly salary level of $641 per week. However, to account for anticipated wage growth through January 2020, an upward adjustment was made, bringing the proposed standard salary level to $679 per week or $35,308 annually.

For the HCE test, the DOL has also been consistent with past practices. The DOL proposes to keep the duties test the same while increasing the salary threshold from $100,000 to $147,414 ($679 of which must be paid weekly on a salary or fee basis). This is higher than the salary level set in the 2016 final rule ($134,004), but the increase is due, in part, to wage growth.

While the adjustments to the salary thresholds follow past practices, the DOL is proposing to revive a 2016-era rule that would allow nondiscretionary bonuses and incentive payments (paid at least annually) to satisfy up to 10% of the standard salary threshold. The remaining 90% must come from a salary or fee basis. For these types of payments to count, they must be paid annually or more frequently.

Under this proposal, employers could make a “catch-up” payment no later than the next pay period after the end of the year to push an employee above the salary threshold. This would allow an employer to make a final payment within one pay period after the end of the year to ensure the employee’s compensation was brought up to the required level.

To ensure that the DOL’s overtime rule does not become outdated, the DOL is proposing to commit itself to updating the salary thresholds every four years. So far, the DOL has ruled out a mechanism to automatically update the thresholds since a similar component in the 2016-era rule was ruled unlawful. As such, these quadrennial updates would be done through the established rulemaking process, just like has been done with the proposed rule discussed above.  

What employers need to know

Once the proposed rule is published in the Federal Register, a 60-day public comment period will begin. Ceridian will continue to monitor additional developments as the DOL works toward approving a final rule. In the meantime, employers may want to dig into the proposed rule on their own and consider what, if any, internal policy changes may be needed. Employers may also want to consider submitting a comment to the proposed rule. It is anticipated that a final rule will become effective in 2020.

Ceridian provides periodic and selected compliance updates that may have relevance to many of our customers. Ceridian provides this information to customers for general information purposes only. This information should not be construed as legal, tax or other advice specific to any individual or organization. Please consult your appropriate adviser for such specific advice.

Adam Wysopal

Adam Wysopal is Compliance Counsel at Ceridian with years of experience advising organizations on regulatory obligations and internal compliance programs. Adam is passionate about technology, innovation, and collaboration. In his current role, Adam enjoys being able to support development teams in their continuous effort to ensure Ceridian’s HCM solutions keep up with evolving employment-related compliance needs.

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