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If the DOL issues the rule in its current form, employers will have to re-examine their exemption decisions.

New Salary Requirements Ahead for Exempt Managers?

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What will the future of overtime look for restaurants?
By Kevin Johnson March 2019 Expert Insights

The Fair Labor Standards Act places important limits on how restaurant operators set the compensation of their store managers and assistants. Specifically, the FLSA requires non-exempt employees to be paid overtime for hours worked beyond 40 in a workweek.

Paying those managers and assistants time-and-a-half for overtime hours may be the most conservative strategy for avoiding an overtime lawsuit. But if operators are attempting to hold down labor costs by avoiding managerial overtime, or if they believe management positions must be salaried to attract the right kind of talent, they may have decided to treat managers and assistants as exempt from overtime.

If so, they must make sure those employees have appropriate duties and salaries to justify application of an exemption. In most cases, they rely on the executive exemption.

Using this exemption for assistant managers can be riskier than it is for managers. In both cases, the risk level may depend on the operator’s ability to establish that the manager has exempt work as his or her primary duty. Plaintiff’s lawyers like to paint assistant managers as “working foremen” who usually do non-exempt work. Operators must be able to point to real management duties that are the primary responsibility of the manager.

Under this “duties test,” the manager must supervise at least 80 hours of work by subordinates each week; must participate in hiring, firing, or other employment decisions regarding those subordinates; and management must be the manager’s primary duty.

To pass the salary test the manager must earn at least $455 per week ($23,660 annually).

That minimum salary requirement may soon go higher. 

Earlier this year, the Department of Labor released a proposal to update its overtime-exemption rules for so-called white-collar employees—those covered by the executive, administrative, and professional exemptions. If adopted, the proposal will raise the salary test to at least $679 per week ($35,308 per year). However, the DOL’s proposal makes clear it intends to leave the duties tests for the exemptions unchanged. 

Employers may recall that the Obama DOL tried to update the white-collar regulations in 2016, raising the salary test from $23,660 annually to $47,476. Eight days before that rule was to go into effect, the U.S. District Court for the Eastern District of Texas issued an injunction blocking its enforcement. Ultimately, that court granted summary judgment in favor of business groups that had sued to block the rule. 

The DOL appealed that ruling to the Fifth Circuit Court of Appeals, which stayed the appeal based on representations from the DOL, which by then was reporting to a new president, that it intended to revisit the rule. The DOL’s Notice of Proposed Rulemaking, issued March 7, is the first indication how the DOL intends to revamp the rule. 

One of the district court’s concerns about the 2016 rule was the drastic increase in the salary test. That test had been set at $23,660 annually since the rule was last updated in 2004. By increasing the test to a threshold of $47,476, the 2016 rule would have prevented several million employees from being exempted.

The district court noted that the DOL had historically used the salary test as a screening tool. In essence, the DOL reasoned that employees who made less than the salary threshold were unlikely to have duties that would qualify for the exemption, so there was no need for the department to spend time or effort evaluating their duties. On the other hand, those paid more than the threshold might or might not be employed in an exempt capacity, making it necessary for the department to apply the duties test to sort them into exempt and non-exempt categories.

The 2016 rule increased the threshold so drastically that it appeared to the district court that the rule was no longer applying the salary test to eliminate obviously non-exempt employees from the exemptions’ coverage. Instead, it carved deeply into the group of employees that had duties sufficient to satisfy the exemptions, and eliminated a substantial number of them based solely upon their pay. In the district court’s view, this was inconsistent with the language of the FLSA itself, which defined the white-collar exemptions solely in terms of duties, not salary.

The proposed 2019 rule sets a more conservative salary threshold. Rather than setting the salary threshold at 40 percent of the national average earnings for full-time salaried workers, the department returns to the methodology used in 2004: setting the wage at 20 percent of the average earnings for full-time workers in the lowest-wage region of the country (the South) and the lowest-wage sector (retail). This resulted in a proposed salary threshold of $679 per week ($35,308 annually).

The department also considered whether it should include some form of automatic indexing. The 2016 rule would have required an automatic reset of the salary threshold every three years using a predefined formula. In the 2019 rule, the DOL proposes to scrap that approach in favor of an actual review by the department every four years, followed by a rulemaking process that would allow interested parties to voice their opinions. The DOL believes this approach will give it more flexibility to deal with unforeseen economic conditions, while producing more regular and less disruptive updates to the salary threshold.

Other important updates:

  • A boost to the compensation required to meet the “highly-compensated employee” exception to the white-collar exemption duties tests, such that the threshold will move from $100,000 to $147,414 (of which at least $679 per week must be paid on a salary basis).
  • A provision that retains the feature in the 2016 rule that would have allowed employers to satisfy up to 10 percent of the applicable salary threshold through payment of nondiscretionary bonuses or incentive compensation, provided that they are paid annually or more frequently.
  • Updates to special salary thresholds for Puerto Rico, certain U.S. territories, and employees in the motion picture production industry.
  • The DOL has engaged in several listening sessions and sifted through thousands of comments. The proposed rule will now be opened up for a formal period of public comment. Those comments will then be considered and any necessary revisions will be incorporated into a Final Rule. The DOL’s Notice of Proposed Rulemaking suggests that DOL is targeting a January 2020 date for the Final Rule to go into effect.

To obtain a full copy of the Notice of Proposed Rulemaking and instructions on submitting comments, visit: https://www.dol.gov/whd/overtime/overtime2019-nprm.pdf

If the DOL issues the rule in its current form, employers will have to re-examine their exemption decisions. If the rule passes, operators will have to raise managers’ salaries above $35,308 to maintain their exempt status, or convert them to non-exempt hourly employees and start paying them overtime.

Attorney Kevin Johnson is a founder of Tampa-based employment law firm Johnson Jackson LLC.