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Comp Doctor™: Changes to the Fair Labor Standards Act (FLSA) Salary Threshold

Comp Doctor™: Changes to the Fair Labor Standards Act (FLSA) Salary Threshold

Question: After waiting so long for the Department of Labor (DoL) to issue a ruling, what has happened with the new salary threshold for exemption from overtime?

 


 

Well, before we answer that question, we should probably have a refresher on where things were in relation to the FLSA (for those who have been living without exposure to the outside world, this is the Fair Labor Standards Act.) The salary threshold had been at $455 per week or $23,660 annual pay for a number of decades. That meant that any employee who made less than the threshold amount would automatically be considered non-exempt and have to receive overtime pay. (Receiving pay over that threshold does not guarantee exemption as there are still tests that need to be passed in order to qualify.)

In December 2016, the DoL (the Department of Labor) under the Obama administration, proposed adjusting that threshold to $913 per week or $47,476 annually. That threshold would be adjusted every three years based on changes to the earnings of full-time salaried workers in the lowest-wage census region. Just before this DoL rule was to take effect, on August 31, 2017, an injunction was issued by the Federal courts that put a hold on that rule change.

On March 7, 2019, the DoL issued a new rule on the exemption salary threshold.

The new exemption threshold is $679 per week or $35,308 annually. This amount is almost exactly halfway between the original threshold and the one proposed in 2016.  The threshold will increase every four years, but only after an announced notice and a period of time for the public to comment on these changes (normally these periods are 60 days).

Certain nondiscretionary bonuses and incentive payments may count for up to 10% of an employee’s salary for purposes of the exemption salary threshold. At this time, there does not appear to be an academic administrative exemption for the higher education sector, but that could be included in a more detailed response from the DoL.

There are no changes to the duties test under the current rule.

One change that we found a bit surprising was that the threshold for highly compensated employees is to be increased to an annual rate of $147,414. This is more than $13,000 higher than the proposed 2016 rule.   

So what do we expect to happen if this rule is adopted?

First, the DoL estimates that this new salary threshold will affect more than 1.1 million individuals currently classified as exempt. These employees either will have to be reclassified as non-exempt or receive a pay increase to the new threshold. 

Before issuing its final rule, the DoL will accept comments from the public for 60 days once the notice is published in the Federal Register. Should anyone wish to do so, the proposed rule can be found at www.regulations.gov, in the rulemaking docket RIN 1235-AA20. 

Even after that 60-day period expires, challenges in the courts are likely if the last proposed change is any indication.  So the odds of the rule becoming effective on the expected implementation date of January 2020 are, in our humble opinion, fairly low. However, organizations who have not prepared for the new threshold should take this opportunity to do so, and apply both the new rule and existing duties test to see where any changes might be required, just to be on the safe side.

When considering changing an employee from an exempt status to a non-exempt status, remember to consider the financial impact (including potential overtime costs), the need to document all time on a weekly basis, and the loss of status an employee may feel (many view a non-exempt designation as a lower status in the organization).

 


 

Note: This is a pre-publication copy of the article to appear in the May 2019 issue of HR NEWS.

 

The Comp Doctor™ is the team of Jim Fox and Bruce Lawson, Managing Directors in the Human Resources & Compensation Consulting practice of Arthur J. Gallagher & Co. They specialize in assisting governments in fixing their compensation and classification systems.

 

If you have a question you would like to have them answer, please write to them at jim_fox@ajg.com or bruce_lawson@ajg.com. They will try to include it in a future issue of Comp Doctor™.

 

 

Jim Fox

Dr. Fox is a Managing Director of the public sector and higher education compensation part of the Gallagher Human Resources & Compensation Consulting practice. In this capacity, Dr. Fox serves as project director and/or technical advisor, providing technical direction and quality assurance. He is responsible for all consulting activities in the areas of job evaluation and compensation, organization analysis, personnel systems and policy development.

Dr. Fox has been directing classification and compensation studies for more than ...

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Bruce Lawson

Mr. Lawson is a Managing Director of the public sector and higher education compensation service line of the Gallagher Human Resources & Compensation Consulting practice. In this capacity, Mr. Lawson serves as project director and/or technical advisor, providing technical direction and quality assurance. He is responsible for all consulting activities in the areas of job evaluation and compensation, organization analysis, personnel systems and policy development.

Mr. Lawson has been directing classification and compensation studies for more ...

Read Full Bio