Minimum Salary Level
Yesterday, the Department of Labor set the minimum salary level for the administrative, executive and professional overtime exemption at $913 per week ($47,476 annualized) – up from the current $455 per week ($23,660 annualized), but down from the proposed $970 per week ($50,440 annualized).
The decrease from $50,440 to $47,500 allows the Administration claim that they listened to the concerns of business, but does not actually respond to the concerns raised by non-profits, small businesses, colleges and universities, state and local governments and low-profit industries such as restaurants and retail.
$47,500 is still way too high – unprecedented in the 77-year history of the regulations. It’s higher than the current minimum salary levels for exemption under California and New York law – two high-cost of living, high salary states. Just like the minimum wage, states may set higher standards for exemptions from state overtime requirements. In California, the minimum salary level is currently $41,600 annually. In New York, the minimum salary level is $35,100 annually. Thus, the Department’s $47,500 salary level is: $5,900 higher than the salary level required for exemption in California; and $12,400 higher than the salary level required in New York.
The Department’s methodology – using the 40 percentile to set the minimum salary – is inconsistent with all previous changes to the salary level. In 1958, DOL used data on actual salary levels of employees that wage and hour investigators found to be exempt during investigations, and then set the minimum salary required for exemption at a level that would exclude the lowest 10th percentile of employees in the lowest wage region, the lowest wage industries, the smallest businesses and the smallest cities. If the 1958 methodology were applied today, the minimum salary level would by about $35,000. Similarly, in 2004, using BLS data on salaries paid to both exempt and non-exempt employee, DOL set the minimum salary level to exclude the lowest 20th percentile of employees in the lowest wage region (South) and industry (Retail). DOL doubled the percentile used, from 10% to 20%, to account for changes to the duties test made in the 2004. If the 2004 methodology were applied today, the resulting minimum salary level would be about $30,000.
Automatic Increases to the Salary Level
Under the new regulations, the salary level will be automatically increased every 3 years (beginning January 1, 2020) based on the earnings level for the 40th percentile of full-time salary workers in the lowest wage Census region (currently the South region).
This is an improvement over the proposal to automatically increase the salary level ever, but still unprecedented in the 77-year history of the regulations.
DOL has never before increased the salary level for exemption without first giving the public an opportunity to comment on the amount of the increase. In fact, DOL stated in the 2004 revisions to these regulations that it did not have the authority to increase the salary level without notice and comment rulemaking.
This part of the rule may be subject to a legal challenge on the issue of whether Congress gave DOL the authority to provide automatic increases. Congress has rejected amendments to the FLSA to index the minimum wage, and it seems unlikely to have authorized indexing for an exemption from the minimum wage and overtime.
Bonuses and Commissions
DOL will allow employers to count some bonuses and commissions towards the minimum salary level, but only if paid quarterly or more frequently and limited to 10% of the minimum salary level.
Again, an improvement over the proposed regulations which did not allow credit for commissions or for any incentive pay paid quarterly. However, many business groups asked DOL to allow credit for more than 10% and for annual bonuses.
Traditionally, the salary requirement has been a week-by-week requirement, and more study is needed to determine how counting quarterly bonuses and commissions are going to work.
One impact of this new provision is that employers likely will start changing their annual bonuses to quarterly ones.
DOL has not made any changes to the job duty requirements for the exemptions.
This is a win for businesses, but because of the outrageously high salary level is a pyrrhic victory. DOL has proposed to limit the amount of time exempt employees could spend performing non-exempt work, including by adopting the California rule that exempt employees must spend at least 50% of their time exclusively performing exempt work, adopting some percentage that is less than 50%, or eliminating the “concurrent duties” provision which provides that exempt managers who choose to perform non-exempt work such as running a cash register or stocking shelves do not lose the exemption if they are still, concurrently, supervising employees and responsible for other management duties.
Maintaining the current regulations was essential to allow employers in the restaurant and retail industries to continue classifying assistant managers and small store managers as exempt, but with the new high salary threshold many of such managers will need to be reclassified anyway. For example, according the National Restaurant Association, the median salary of first-level managers in restaurants is $38,000.
Effective Date/Impact on Employees
The new salary level becomes effective on December 1, 2016, which is approximately 200 days to prepare for implementation.
Businesses were concerned that DOL would give employers only 60 days to comply, which would be very difficult to impossible. We did not think that DOL will give more than 120 days, which was the effective date in 2004. So, on the one hand, the additional time to comply is a welcome surprise. On the other hand, the December 1 effective date is very clever politically. The Administration and Hilary Clinton will be able to claim throughout the Presidential campaign that the Final Rule will “give America a raise” and is great for the middle class, and that voting for the Republican nominee will put all of this in danger. However, because the effective date is after the election, employees will go to the ballot box believing they will soon get a wage increase, when that is not likely to happen, and before they feel all the negative effects of being reclassified as non-exempt.
The Final Rule will not “give America a raise” because most employers do not have piles of cash lying around or money trees to harvest, most employees are not likely to see large increases in their paycheck. Employers will adjust by rolling bonuses and commissions into base pay in order to meet the new $47,500 level, reclassifying employees to non-exempt and controlling hours to 40, or reclassifying employees and paying a “cost –neutral hourly rate” – that is, an hourly rate which, given the expected overtime hours, will result in the same amount of weekly and annual compensation (using the following formula: Current Weekly Salary / (40 hours + (overtime hours x 1.5)).
For companies that decide to limit hours to 40 to avoid the additional overtime costs, yes, some employees will enjoy the additional free time. But many others would prefer to work more hours and make more money – and won’t be able to do so. Almost 19% of employees are underemployed – that is, they want full-time jobs but cannot get them. And any extra free time comes with other negative consequences. Many employees will view reclassification as a demotion out of management. Reclassified employees may lose benefits commonly available only to exempt employees such as bonuses, profit-sharing, stock options, more paid vacation, better health and disability benefits, employer-paid life insurance, etc., and reclassified employees will lose work place flexibility because they will no longer be paid a guaranteed salary every week, regardless of hours worked, as is required for exempt employees – in other words, employers cannot reduce the salary of exempt employees if they take a 2-hour lunch, go home early on Friday, or take a half-day off to attend a parent-teacher conference, but non-exempt employees who are paid only for the time they actually work will lose pay every time they choose to take time off.