As Leaves Fall, Wage Rates Set to Rise: Part I of II
Fair Labor Standards Act --
Minimum Exempt Salary Level Set to Increase on December 1, 2016*
(*See "Update" at the end of this post.)
Employers who have Washington employees need to plan for upcoming federal, state and local requirements for pay increases. This post addresses the forthcoming federal requirement for employers to increase certain employees' pay.
Under new Fair Labor Standards Act regulations, effective December 1, 2016, if an employer has overtime-exempt employees with salaries lower than $47,476 per year ($913 per week), then in order to continue treating these employees as exempt under the FLSA’s "white-collar" exemptions (i.e., for qualifying executives, administrators and professionals), the employer must increase their salaries to the new minimum salary level of $47,476 per year. This controversial mandate more than doubles the current FLSA minimum salary of $23,660 per year. Up to 10% of the new FLSA minimum salary maybe satisfied through non-discretionary bonuses and incentive payments, as long as these amounts are paid at least quarterly.
The U.S. Department of Labor set this new minimum salary level for white-collar workers to equal the 40th percentile of earnings by full-time salaried workers in the lowest-wage Census Region. Every three years thereafter (starting January 1, 2020), DOL will further adjust the minimum salary level to keep it at this new 40th percentile benchmark.
The minimum annual salary necessary to qualify for the highly compensated employee (HCE) overtime exemption also is increasing, from $100,000 to $134,000 (equivalent to the 90th percentile of earnings by full-time salaried workers nationally). However, because Washington State does not have a state law equivalent of the HCE exemption, and because employers must apply the federal or local law that's most favorable to employees, an employer should not use the HCE exemption for any of its Washington employees. Instead, the employer should ensure that its exempt employees meet all of the standards for an exemption that is available under both Washington and federal law. In other words, to qualify as exempt from the federal and Washington overtime laws, the employee's pay and duties must satisfy: the FLSA's minimum salary or pay level for the particular exemption; the "salary basis" requirements that apply when the employer uses one of the white-collar exemptions; and the "duties test" that applies to the desired exemption.
Recently, both court challenges and proposed Congressional legislation have sought to either invalidate or delay implementation of the new FLSA regulations. The court challenges seek rulings invalidating the new regulations, and these lawsuits could remain pending for a substantial amount of time. The proposed legislation to delay the new regulations' effective date by six months is moving faster, with the House of Representatives having passed that bill on September 27, 2016. However, President Obama has threatened a veto, should this bill also pass the Senate, so employers are unlikely to see a reprieve.
In short, the wise employer will be ready to implement the new FLSA minimum salary level regulations on December 1, 2016, when they are slated to take effect. Employers risk substantial back pay liability and class action litigation if they delay complying with the new requirements and simply gamble on the pending lawsuits ultimately achieving rulings that invalidate the new regulations.
Update: On November 22, 2016, a Texas federal district court issued a nationwide injunction blocking the new DOL overtime rule from taking effect on December 1, as previously set. On December 1, DOL appealed the injunction ruling to the U.S. Court of Appeals for the Fifth Circuit, which has granted DOL's expedited briefing request. However, this expedited briefing schedule extends into the early days of the Trump administration, and there are multiple political avenues that now might be used to prevent the Obama administration's overtime rule from ever taking effect. Employers should continue to closely watch this issue.
The complexities of the FLSA and Washington State overtime exemptions are subjects with which employment law attorney Karen Kruse regularly assists employers.