A recent Department of Labor (DOL) proposal would increase the salary and compensation levels for workers to be exempt from minimum wage and overtime requirements under the Fair Labor Standards Act (FLSA). DOL estimates about a million people could become eligible for overtime under the revised salary thresholds. Along with assessing the proposal’s direct impact on payroll, employers should evaluate the possible indirect impact on some employee benefit plans. Comments on the proposal are due May 21.
The FLSA requires covered employers to pay a minimum wage to nearly all employees and overtime pay that’s at least 150% of an employee’s regular rate of pay for any work hours exceeding 40 in a week. The FLSA provides a number of exemptions to these requirements. One minimum wage and overtime exemption, known as the “white-collar exemption,” applies to bona fide executive, administrative, professional, outside sales and certain computer employees.
Since 1940, the regulations implementing the white-collar exemption generally have required an exempt employee to satisfy three tests:
In addition, a separate exemption applies to highly compensated employees (HCEs), who are defined differently for this purpose than for nondiscrimination testing. The HCE exemption requires an employee’s total compensation (including commissions, nondiscretionary bonuses and certain other nondiscretionary compensation) to meet a much higher threshold — currently $100,000. In addition, an HCE must meet the salary level test (based on the salary portion of total compensation) and a more relaxed duties test.
In 2016, DOL sought to raise the salary level test to $913 per week and the HCE compensation test to $134,004. But a US district court invalidated that rule in 2017, finding the salary level was so high that it effectively eliminated the duties test (Nevada v. US Dep’t of Labor, No. 4:16-cv-00731-ALM (E.D. Tex. Aug. 31, 2017)).
The proposed rule would raise the minimum threshold for the salary level test to $679 per week. For non-HCEs, nondiscretionary bonuses and incentive payments (including commissions) could satisfy up to 10% of that test, provided the bonuses are paid at least annually. The proposal would also raise the total compensation threshold for the HCE test to $147,414.
Both the salary level and HCE compensation tests exclude the value of board and lodging, as well as employer payments for medical insurance, life insurance, retirement plans or other fringe benefits. DOL proposes to update the salary level and HCE compensation threshold every four years through a formal regulatory notice and comment process.
The changes to the overtime rules could affect plan costs and nondiscrimination testing results.
If retirement plan sponsors pay more overtime to more employees, both defined benefit (DB) and defined contribution (DC) plans that recognize overtime in their definition of earnings may see increased costs:
The proposal is unlikely to substantially change the number of HCEs (as defined for nondiscrimination purposes) and nonhighly compensated employees (NHCEs) since the salary level for overtime exemption is relatively low. (The proposed salary level of $679 per week equates to $35,308 per year, whereas the 2019 HCE threshold for retirement plans is $125,000.) However, a plan’s NHCE accrual rates and deferral/contribution percentages may fall if the plan excludes overtime from the pay used to determine benefits but includes overtime in the pay used for nondiscrimination testing. Since HCE accrual rates and deferral/contribution percentages won’t be affected — HCEs probably aren’t getting overtime now and won’t be after the rule change — the overall testing results may suffer.
The increase in salary thresholds means that some currently exempt employees will be reclassified as nonexempt. Employers should check to see if eligibility for any health or fringe benefits (such as adoption or education assistance, employee discount programs, or group term life insurance) is conditioned on an employee’s exempt or nonexempt status. A change in the population of eligible employees for any particular benefit could affect its cost and effectiveness.
A separate proposal from DOL would clarify the perquisites and benefits that can be excluded from an nonexempt employee’s regular pay rate when calculating overtime pay. Comments on that proposal are due May 28.