Following two years of anticipation, after a similar but more aggressive rule was proposed by President Obama’s administration and then squashed by federal courts in Texas, the Department of Labor (DOL) has issued the long-awaited Notice of Proposed Rulemaking that, if enacted, would expand access to overtime pay for certain employees under the Fair Labor Standards Act (FLSA).  DOL estimates that this change could expand overtime eligibility for over one million American workers, about 3.7 million fewer than would have been impacted under the Obama proposal.  The proposed rule is available here.

Impact of Obama-Era Proposal

Under the rule currently in effect, certain white-collar workers are exempt from the FLSA’s overtime pay requirements if they are paid a salary of at least $455 per week (annualized to $23,660) and perform certain specified duties.  This minimum salary threshold was last increased in 2004.  The Obama-era rule would have more than doubled the minimum salary to $970 per week (annualized to $47,476), with a mechanism for automatic adjustments every three years to keep up with inflation.

While DOL estimated that the Obama proposal would expand overtime protections to nearly 4.2 million then-exempt employees, critics argued that the higher salary threshold would increase business costs, drive up the use of part-time entry-level workers and independent contractors, and ultimately reduce opportunities for employees reclassified as non-exempt.  A group of 21 states and over 50 business groups filed a lawsuit in federal district court seeking to enjoin the rule.  The U.S. District Court for the Eastern District of Texas issued a preliminary nationwide injunction just one week before the rule was set to take effect in November 2016.  In August 2017, the district court invalidated the rule, holding that DOL exceeded its statutory authority by increasing the salary threshold to a level that had the effect of eviscerating the duties test.

Under the new Trump Administration, DOL adopted a different approach to defending the lawsuit.  DOL now agreed with the plaintiffs that the Obama-era increase was too high, but it nevertheless continued to defend the agency’s authority to set the minimum salary threshold.  In October 2017, DOL appealed the district court’s decision to the Fifth Circuit, but asked the appeals court to hold the appeal in abeyance while DOL undertook further rulemaking to determine the appropriate salary level.  The new proposed rule announced March 7, 2019, is the culmination of that process.

The New Proposal

The new proposed rule would increase the minimum salary threshold to $679 per week, or $35,308 annually.  It also would permit employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary threshold, provided that such bonuses are paid annually or more frequently.  A nearly identical provision was included in the Obama-era rule.  Although some employers may find the new proposal’s $35,308 salary threshold more palatable than the higher threshold in the Obama-era proposal, the new rule may face criticism because, like the Obama rule, it fails to account for industry-specific or regional differences in market salaries.

The new proposed rule would also change the Highly Compensated Employee (HCE) test.  The HCE test allows employers to apply overtime exemptions to employees under a reduced duties requirement if the employee meets a higher compensation threshold.  The proposed rule would increase the HCE compensation level to $147,414 from $100,000, equivalent to the 90th percentile of full-time salaried workers nationally.  The Obama proposal included a more modest increase to $134,004.

As with the Obama rule, the new proposed rule does not change the “duties test,” meaning that there will be no change to which workers qualify as “white collar” based on the job duties they perform.

One unique feature of the new proposed rule is a requirement that salary levels be updated every four years through the regular notice-and-comment rulemaking process.  This contrasts with the automatic updates in the Obama-era proposal, which drew criticism for being too rigid in not allowing more discretion from DOL or input from the public.

What’s Next

The new proposed rule does not take effect immediately.  The public will have 60 days to comment from the date the proposed rule is published in the Federal Register.  A final rule will be published after the comment period has ended.

Employers should keep in mind that some states, such as California, continue to have stricter requirements and salary thresholds for overtime exemption than under the federal FLSA.

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Photo of Lindsay Burke Lindsay Burke

Lindsay Burke co-chairs the firm’s Employment Practice Group and regularly advises U.S., international, and multinational employers on employee management and culture issues and international HR compliance. She is a key member of the firm’s Institutional Culture and Social Responsibility practice, working together with…

Lindsay Burke co-chairs the firm’s Employment Practice Group and regularly advises U.S., international, and multinational employers on employee management and culture issues and international HR compliance. She is a key member of the firm’s Institutional Culture and Social Responsibility practice, working together with white collar colleagues to conduct culture assessments, internal investigations of executive misconduct, and civil rights and racial equity audits and assessments. Lindsay has been at the forefront of the changing workplace issues impacting employers in the U.S. in the last decade, including #MeToo, Covid-19, and the renewed focus on diversity, equity, and inclusion. She frequently advises employers in relation to their processes and procedures for investigating complaints of discrimination, harassment, and retaliation and trains executive teams and board members on culture risk and the lawful implementation of DEI programs.

Lindsay also guides employers through the process of hiring and terminating employees and managing their performance, including the drafting and review of employment agreements, restrictive covenant agreements, separation agreements, performance plans, and key employee policies and handbooks. She provides practical advice against the backdrop of the web of state and federal employment laws, such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Equal Pay Act, the Family and Medical Leave Act, the Fair Labor Standards Act, and the False Claims Act, with the objective of minimizing the risk of employee litigation. When litigation looms, Lindsay relies on her experience as an employment litigator to offer employers strategic advice and assistance in responding to demand letters and agency charges.

Lindsay works frequently with the firm’s privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups. She also regularly provides U.S. employment law training, support, and assistance to start-ups, non-profits, and foreign parent companies opening affiliates in the U.S.

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Photo of Carolyn Rashby Carolyn Rashby

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. Carolyn’s approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.…

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. Carolyn’s approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.

As a senior member of Covington’s Institutional Culture and Social Responsibility Practice Group, Carolyn has co-led significant investigations into workplace culture, DEI issues, and reports of sexual misconduct and workplace harassment.

As an employment lawyer with over two decades of experience, Carolyn focuses on a wide range of compliance and regulatory matters for employers, including:

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  • Advising on employment issues arising in corporate transactions
  • Strategic counseling on a wide range of issues including discrimination and harassment, wages and hours, worker classification, workplace accommodations and leave management, performance management and termination decisions, workplace violence, employment agreements, trade secrets, restrictive covenants, employee handbooks, and personnel policies
  • Drafting employment contracts and offer letters, separation agreements, NDAs, and other employment agreements
  • Advising on employee privacy matters, including under the California Consumer Privacy Act
  • Providing guidance on use of AI in the workplace and development of related policies
  • Leading anti-harassment and other workplace-related trainings, for employees, executives, and boards

Carolyn also works frequently with the firm’s white collar, privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups.

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Photo of Tom Plotkin Tom Plotkin

Tom Plotkin advises companies on a broad range of ESG issues with a focus on social responsibility, including business and human rights, equity and civil rights, and external engagement and brand reputation.

As a member of Covington’s Business and Human Rights practice, Tom…

Tom Plotkin advises companies on a broad range of ESG issues with a focus on social responsibility, including business and human rights, equity and civil rights, and external engagement and brand reputation.

As a member of Covington’s Business and Human Rights practice, Tom advises clients on all aspects of the corporate responsibility to respect human rights, including issues related to supply chain due diligence and responsible sourcing, downstream product use and human rights impacts, and strategies for integrating human rights oversight into broader compliance programs.

Tom is also a member of Covington’s Institutional Culture and Social Responsibility practice, where he assists companies in evaluating and managing the legal, business, and reputational risks associated with social impacts of business practices. Tom’s work in this area focuses on civil rights and diversity, equity, and inclusion.

As a member of Covington’s ESG practice, Tom draws on his social responsibility portfolio to assist companies in bridging internal practices and external engagement strategies. Tom assists with public ESG reporting, responding to shareholder ESG proposals, and external stakeholder engagement.

Tom is also a member of Covington’s Employment practice, where he advises on a range of domestic and international employment law issues.

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