On September 24, 2019, the U.S Department of Labor (DOL) announced its final rule updating the minimum salary level required to be paid to employees classified as executive, administrative or professional employees. The rule updates the salary level of $23,660 that had been in effect since 2004 to a new level of $35,568 per year effective January 1, 2020.

A Skinny Update!

The new rule follows the unsuccessful attempt by the DOL in 2016 to increase the base salary necessary to qualify for an exemption from overtime to a total of $47,476 per year. That increase was met with strong opposition from the business community and a number of states before a Federal District Judge in Texas ruled that the DOL had exceeded its rule making authority by increasing the base salary so drastically and by mandating that the base salary level be increased every three years. Estimates at the time were that roughly 4.2 million U.S. workers would be impacted by the rule, with either an increase in their base salary or by changing them to hourly employees who would then be eligible for overtime.

The new increase is far less drastic and is expected to impact only roughly 25% of the workers that would have seen changes to their pay under the 2016 rule. The new rule places the minimum salary level at the exact mid-point between the existing base salary and the level scuttled by the court, making employers less unhappy and many employees very unhappy.

Other Key Provisions

  • The new rule abandons the automatic updates of the 2016 rule in favor of revisiting the rates every four years with changes made only after giving notice of proposed changes and soliciting comments from the public.
  • Employers will be able to use nondiscretionary bonuses and incentive payments including commissions that are paid annually or more frequently to satisfy up to 10% of the standard salary level.
  • The new rule also changes the base compensation level of “Highly Compensated” Workers from $100,000 or more annually to $107,432 or more annually. Highly Compensated Workers are those that perform mostly office or non-manual work and who meet some, but not all, of the requirements to be classified as executive, administrative or professional employees. These employees must be paid the new base salary plus additional compensation to reach the new threshold.

Impact in the Workplace

  • Commencing January 1, 2020, employees currently classified as salaried exempt who earn between $23,660 annually and the new base level of $35,568 will either have their salary increased to at least the new base level or will be converted to hourly status where they will be eligible for overtime.
  • As was the case before the planned implementation of the 2016 rule, employers will have to determine for each employee or group of employees whether it is better to have them available to work more than 40 hours per week for the new salary, or whether it is better to convert them to hourly with overtime paid for hours worked in excess of 40 per week. Of course, it is more than just a math issue as many employees wish to have the implied prestige of treatment as a salaried employee and will resist rejoining the hourly ranks of the workplace.

Is This It?

Since the rule was just announced in its final form, it is difficult to say whether it will face the litigation that proved fatal to its predecessor. Notably, the base rate was established using the same data and calculations that supported the 2004 base salary- i.e., it is based on the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (then and now the South) and/or in the retail sector nationwide. The Texas Federal Court that nixed the prior rule held that a salary floor near the lower end of the range of prevailing salaries was an acceptable method of screening out obviously nonexempt employees while at the same time preserving the importance of analyzing their duties to make sure they fit the administrative, executive or professional exemptions.

Since the 2016 rule more than doubled the base salary, the court held that the salary itself became more important than the duties performed in assessing whether an employee should be exempt from overtime and, in the courts view, violated the intention of Congress in only exempting from overtime those that met the administrative, executive or professional duties tests. The Court pointed to the 4.2 million workers that would potentially be converted from salary back to hourly as evidence that even though they fulfilled the duties of an exempt position they would not be treated as such if they did not receive the new base salary. Much the same can be said of the 1.3 million workers impacted by the new rule. While there is an almost universal consensus that the base salary needed to be increased from the old $23,660 level, it remains to be seen whether the increase was modest enough to satisfy those that fought the 2016 increase or whether the challenge this time will come from employee advocates who assert the increase falls well short of a reasonable update to the base salary level.

Stay tuned!

The Employment practice team at Rhoades McKee will keep close track of any further developments regarding the new salary rule so that Michigan Employers have the best possible information to run their businesses.

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