Salary Threshold Increase for Exempt Employees

The minimum federal salary threshold for white-collar employees may soon increase from $23,660 to $35,308.  The U.S. Department of Labor recently released a proposed rule increasing the long-standing amount, as one of the requirements for “exempt” employees under the Fair Labor Standards Act.  Consequently, nonprofit employers with modestly or low-paid executive directors and other dedicated leaders may need to revisit their compensation structures to ensure that key leaders remain as exempt employees, for purposes of overtime pay and related legal compliance. In case this news sounds familiar, it is.  The DOL previously tried to increase the salary threshold much more drastically, and this second attempt might just stick. 

Three-Part Test for Exempt White-Collar Employees – Change Afoot?

The FLSA and related state counterparts require that employers pay overtime wages and provide other benefits to “non-exempt” employees.  Exempt employees are those employees covered by a specific exemption category, including the “white-collar” exemption.  To qualify for this exemption category, an employee must meet the following three elements: (1) the employee must perform executive, administrative, or professional duties; (2)  the employee must be salaried; and (3) the employee must receive at least the minimum salary threshold.  Under many state laws, this three-part test – including the federally prescribed salary threshold – applies equally for purposes of state wage laws.  

Currently, an exempt employee must be paid at least $455 per week ($23,660 per year).  This amount has been updated only once since the 1970s – in 2004. 

In 2016, the DOL proposed increasing the minimum salary threshold from $23,660 to over $47,476, more than doubling this amount.  Hue and cry erupted, with an enormous outpouring of approximately 270,000 objecting comments that were publicly filed.  Many nonprofits became quite alarmed, since such change would have imposed drastic financial adjustments to compensate currently exempt employees who work sacrificially long hours for low pay.  Amid the consternation, several states sued the DOL in federal court in Texas and gained an injunctive victory.  More specifically, the court’s ruling put the DOL’s proposed increased salary threshold permanently on hold. To revisit the saga, see our firm’s article from September 2017, with references to related prior blogs.

How Should Employers Prepare and Respond?   

Given the lower degree of salary threshold increase, it is much more likely that it will go into effect. What will that mean for nonprofit employers?  As with the DOL’s prior proposal, this prospect warrants careful review of employers’ pay practices, including classification of employees as exempt or non-exempt, compensation amounts, overtime pay compliance, time-keeping requirements, and related legal compliance. 

First, with respect to employee classification, remember the white-collar exemption requirements. An “executive” employee should be one (a) whose primary duty is managing the organization or a significant part of it, (b) who regularly directs the work of two or more other employees, and (c) who has the authority to hire or fire other employees or whose input on personnel matters is given particular weight. Such employees thus should be primarily engaged in managerial decisions like regularly assigning work, training, budget planning, making major purchases, and handling legal compliance matters. An exempt “administrative” employee is one (a) whose primary duty is performing office or other non-manual work directly related to the organization’s operations, and (b) who exercises “discretion and independent judgment” in “significant” matters.  The first prong is relatively straightforward.  The second prong is much more challenging, with elusive terminology and highly fact-specific determinations.  The professional employee exemption is far more straightforward.  To qualify, the employee’s primary duty must be to perform work either (a) requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (b) requiring creativity, invention, imagination, originality, or talent in a “recognized field of artistic or creative endeavor.”  

Second, with respect to compensation amounts for purposes of the salary threshold, note that cash wages, non-discretionary (i.e., earned) bonuses of up to 10% of the threshold, and commissions (also to a limited extent) may be counted as compensation for purposes of salary threshold. Unfortunately, however, employee fringe benefits such as payment of health insurance premiums, retirement contributions, and provision for lodging and meals cannot be counted. Consequently, employers with employees below the
salary threshold may wish to rethink employee benefits and perhaps offer at least some of them through increased wages (albeit with resulting employment tax consequences). 
  
Third, consider overtime pay compliance for non-exempt employees, as part of the employer’s overall legal compliance. For example, if non-exempt employees occasionally perform duties away from the office or other regular work site, such as to check email or to make phone calls, such work may need to be counted toward the maximum 40-hours per week amount – or the employer will need to pay overtime wages.  In addition, the employer may need to pay wages (and possibly overtime) for travel, depending on the times and amount of travel.  Employers may also need to revisit time reporting, such as through regular time-keeping methods and clear employer-employee communications about expected work hours.  

Fourth, some hard budget and operational evaluation steps may be in order. Should certain exempt employees’ salaries be increased, in order to keep exempt employees as exempt? Or is additional staffing warranted for positions that normally require more than 40 hours for one employee and are paid at levels lower than the newly proposed salary threshold?  Alternatively, are there certain operational areas that could be made more efficient?  Should certain (or all) employees be encouraged to work no more than 40 hours per week, or is some overtime pay appropriate for the non-exempt employees?

Note too employees “volunteering” for overtime is not an option.  As a legal matter, extra time that employees spend on the job for the same type of work as they regularly perform cannot be treated as volunteer service; wages must be paid.  While nonprofit workforces often have highly dedicated and skilled nonprofit workers who work long hours, these hours may result in overtime wage obligations.

Ignoring wage laws is also not an option.  Employees whose rights are violated may generate massive organizational liability, especially if a now-positive employment relationship later sours. Penalties are extremely high for violations, including possible personal liability for directors and officers. 

What’s Next for the Proposed Salary Threshold Increase? 

Keep in mind that the salary increase at this point is only proposed.  The DOL’s proposed rule is open for a public comment period, in keeping with all administrative rule-making.  Consequently, interested members of the public may submit comments about the proposed rule electronically here, in the rulemaking docket RIN 1235-AA20.  Any changes will not take effect until after publication of a final rule.  Additional information and FAQs regarding the proposed rule are available here

In addition, more litigation may be in store. The prior injunction suit, based on the DOL’s earlier salary threshold proposal, is currently on hold with the federal Fifth Circuit Court of Appeals pending the DOL’s issuance of a final rule. Because the increase is less drastic this time around, it seems more likely to pass legal muster. Alternatively, the Court of Appeals could continue the injunction, requiring the DOL to then further lower the proposed salary minimum or for Congress to affirmatively set any new salary threshold for exempt employees. 

In the meantime, wise employers should check their pay practices, ensure that exempt employees are properly categorized, and consider making financial and operational adjustments in anticipation of this proposed employment law change.