The last time
that the salary level was adjusted (to $455/week) was in 2004, and it involved
significant changes in the duties tests. The new regulation retains the exemption for
highly compensated employees (with a shortened duties test), but requires that those
highly compensated exempt employees be paid at least $134,000/year. “The
Department did not propose any changes to how bonuses are treated under the
“total annual compensation” requirement of the HCE test.” In addition, the DOL did not change the
requirement that highly compensated employees still receive the standard
minimum salary each week – thereby NOT incorporating the 10% nondiscretionary
bonus, commission or inceptive pay credit permitted for regular exempt
employees (below). As the DOL explains,
While nondiscretionary bonuses and incentive payments
(including commissions) may be counted toward the HCE total annual compensation
requirement, the HCE test does not allow employers to credit these payment
forms toward the standard salary requirement. We conclude that permitting
employers to use nondiscretionary bonuses and incentive payments to satisfy the
standard salary amount is not appropriate because employers are already
permitted to fulfill almost two-thirds of the HCE total annual compensation
requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary
deferred compensation (paid at least annually). Thus, when conducting the HCE
analysis employers must remain mindful that employees must receive the full
standard salary amount each pay period on a salary or fee basis.
In plain terms, each pay period an employer must pay the exempt
executive, administrative, or professional employee on a salary basis at least
90 percent of the standard salary level required in §§ 541.100(a)(1),
541.200(a)(1), or 541.300(a)(1), and, if at the end of the quarter the sum of
the salary paid plus the nondiscretionary bonuses and incentive payments
(including commissions) paid does not equal the standard salary level for 13 weeks,
the employer has one pay period to make up for the shortfall (up to 10 percent
of the standard salary level). Any such catch-up payment will count only toward
the prior quarter’s salary amount and not toward the salary amount in the
quarter in which it was paid. For example, assume Employee A is an exempt
professional employee who is paid on a weekly basis, and that the standard
salary level test is $913 per week. In January, February, and March, Employee A
must receive $821.70 per week in salary (90 percent of $913), and the remaining
$91.30 in nondiscretionary bonuses and incentive payments (including commissions)
must be paid at least quarterly. If at the end of the quarter the employee has
not received the equivalent of $91.30 per week in such bonuses, the employer
has one additional pay period to pay the employee a lump sum (no greater than
10 percent of the salary level) to raise the employee’s earnings for the
quarter equal to the standard salary level.67 The
Department recognizes that some businesses pay significantly larger bonuses;
where larger bonuses are paid, however, the amount attributable toward the EAP
standard salary level is capped at 10 percent of the required salary amount.
If the employer chooses not to make the catch-up payment, the
employee would be entitled to overtime pay for any overtime hours worked during
the quarter.
According to
the DOL, “[p]romised bonuses such as those announced to
employees to induce them to work more efficiently or to remain with the firm
are considered non-discretionary. See 29 CFR 778.211(c). Examples include
individual or group production bonuses, and bonuses for quality and accuracy of
work. Incentive payments, including commissions, are also considered
nondiscretionary. The DOL refused to
expand “the salary level test calculation to include discretionary bonuses,
payments for medical, disability, or life insurance, or contributions to
retirement plans or other fringe benefits.” it may reconsider that in the future.
Until March 17,
2019, the DOL announced
that it will not enforce the new regulation against “providers
of Medicaid-funded services for individuals with intellectual or developmental
disabilities in residential homes and facilities with 15 or fewer beds.”
Before December 1, many employers will need to adjust their
compensation standards in order to comply with the new regulation. An employer could decide to do the following:
1)
Reclassify currently exempt employees to non-exempt
and pay overtime when they work over 40 hours/week;
2)
Reclassify currently exempt employees to
non-exempt and adjust their compensation (to no lower than the minimum wage)
based on their average hours of work so that they continue to receive
approximately the same amount of total compensation per year;
3)
Reclassify currently exempt employees to
non-exempt and prohibit them from working overtime;
4)
Increase the salary levels of currently exempt
employees so that they remain exempt after December 1;
5)
Re-visit its commission, incentive pay and bonus
policies to determine how those policies will apply to newly non-exempt
employees (and whether it will affect their “regular rate” and overtime compensation rate) and how those policies
will apply to satisfy the new exempt salary level. As noted by the DOL, “[w]here
nondiscretionary bonuses or incentive payments are made to nonexempt employees,
the payments must be included in the regular rate when calculating overtime
pay. The Department’s regulations at §§ 778.208-.210 explain how to include
such payments in the regular rate calculation. One way to calculate and pay
such bonuses is as a percentage of the employee’s total earnings. Under this
method, the payment of the bonus includes the simultaneous payment of overtime
due on the bonus payment. See § 778.210.”
For those of you who care about the details, below is the
new salary basis test at 29 C.F.R. §541.602(a) incorporating the new changes:
(a) General rule. An
employee will be considered to be paid on a “salary basis” within the meaning
of this part if the employee regularly receives each pay period on a weekly, or
less frequent basis, a predetermined amount constituting all or part of the
employee’s compensation, which amount is not subject to reduction because of
variations in the quality or quantity of the work performed.
(1) Subject to the exceptions provided in paragraph (b) of
this section, an exempt employee must receive the full salary for any week in
which the employee performs any work without regard to the number of days or
hours worked. Exempt employees need not be paid for any workweek in which they
perform no work.
(2) An employee is not paid on a salary basis if deductions
from the employee’s predetermined compensation are made for absences occasioned
by the employer or by the operating requirements of the business. If the
employee is ready, willing and able to work, deductions may not be made for
time when work is not available.
(3) Up to ten percent of the salary amount required by §
541.600(a) may be satisfied by the payment of nondiscretionary bonuses,
incentives, and commissions, that are paid quarterly or more frequently. If by
the last pay period of the quarter the sum of the employee’s weekly salary plus
nondiscretionary bonus, incentive, and commission payments received does not
equal 13 times the weekly salary amount required by § 541.600(a), the employer
may make one final payment sufficient to achieve the required level no later
than the next pay period after the end of the quarter. Any such final payment
made after the end of the 13-week period may count only toward the prior
quarter’s salary amount and not toward the salary amount in the quarter it was paid.
This provision does not apply to highly compensated employees under § 541.601.
NOTICE: This summary is designed merely to inform and
alert you of recent legal developments. It does not constitute legal advice and
does not apply to any particular situation because different facts could lead
to different results. Information here can be changed or amended without
notice. Readers should not act upon this information without legal advice. If
you have any questions about anything you have read, you should consult with or
retain an employment attorney.
