Stephen L. Korbel of Babst Calland.

For Pennsylvania employers, Gov. Tom Wolf's recent announcement regarding sweeping changes to Pennsylvania's overtime pay regulations is déjà vu all over again. Most employers will recall the concern, confusion and litigation that followed the Obama administration's attempt in 2016 to nearly double the federal minimum salary levels exemption from overtime pay from $23,360 to $47,476. On Jan. 17, 2018, Wolf announced that the Pennsylvania Department of Labor and Industry will issue proposed regulations in March that will increase the minimum salary level to determine overtime eligibility and will “clarify” the duties test for executive, administrative and professional employees. If the proposed regulatory changes become final, it will be the first time in more than 40 years that Pennsylvania has updated its overtime regulations.

Wolf directed the department to phase in regulatory changes to the minimum salary levels over four years. If enacted, the first stage will raise the salary level to determine overtime eligibility for most workers from the federal minimum of $455 per week, $23,660 annually, to $610 per week, $31,720 annually. The first stage will take effect on Jan. 1, 2020. The minimum salary level will increase to $39,832 on Jan. 1, 2021, followed by an increase to $47,892 in 2022. The Wolf administration estimates that the salary level changes will extend overtime eligibility to 370,000 workers in 2020 and up to 460,000 workers in 2022. Also, following the implementation of the final phase of the new salary level to $47,892 in 2022, the Wolf administration proposed that the minimum salary level automatically update every three years. The first automatic increase would not likely occur until Jan. 1, 2025. At this point, the Wolf administration has not provided any indication as to the manner in which the automatic salary level increase will be calculated or otherwise determined. The department will likely detail how the automatic salary level increase will be determined when it issues the proposed regulations in March.

Beyond the proposed salary level changes, employers must also pay close attention to any proposed regulations that “clarify” the duties test for executive, administrative and professional employee exemptions. If the proposed regulations provide true clarity to the existing duties test regulations, the new regulations will make it much easier for employers to determine if an employee qualifies for an exemption under the duties test. However, if the “clarification” makes material changes to the duties test, the new regulations could result in great uncertainty for employers, particularly because the true meaning of the changes would not be known for several years until the issues are litigated and the new duties test is fleshed out.

Once the department completes its internal process to produce the proposed regulations, the department will publish a notice of proposed rulemaking in the Pennsylvania Bulletin. Thereafter, the department must allow for “sufficient time” for public comment and review before taking any final action. A typical public comment period could last between 30 to 90 days. Once the public comment period ends, the department must review and consider the public comments received. The department is permitted to hold public hearings if it chooses to do so. This process can be lengthy. However, the department could complete the rulemaking process before the end of 2018.

Additionally, any final regulations issued by the department could also be the subject of litigation to prevent the final regulations from becoming effective. Litigation over the implementation of the Obama administration's attempts to increase the minimum salary level exemption is what eventually prevented those proposed regulations from becoming effective.

Specifically, the Obama administration proposed increasing the minimum salary level exemptions from the current federal level of $23,360 to $47,476. Following the issuance of the final regulations, the U.S. Department of Labor (DOL) was sued in two separate actions by 21 states and several business advocacy groups. The lawsuit sought a preliminary injunction to halt the implementation of the final federal rule. The suits were filed in federal district court of the Eastern District of Texas (district court). The district court issued a preliminary injunction holding the final regulation issued by the DOL was unlawful because the final regulation “creates a de facto salary only test to be exempt from overtime, and it did not consider whether employees also had executive, administrative or professional duties as required by federal law. The DOL filed an interlocutory appeal to the district court's decision to issue a preliminary injunction to the U.S Court of Appeals for the Fifth Circuit. While that the DOL's appeal was pending with the Fifth Circuit, the district court issued a final injunction preventing the implementation of the final federal regulation on Aug. 30, 2017. Because of the district court's ruling, the DOL filed a motion which asked the Fifth Circuit to dismiss the DOL's appeal as moot. The Fifth Circuit granted the DOL's motion and the case is now over.

It will certainly be interesting to see if the Wolf administration's approach to this issue, which is materially different than the Obama administration's approach, is enough to withstand the scrutiny that is sure to follow by Pennsylvania's courts.

While Pennsylvania employers eagerly await the proposed regulations, they should not be caught flatfooted. It is premature for Pennsylvania employers to make any drastic changes to their policies, salary structures or employee classification. Instead, they should dust off the plans that were considered at the time of the Obama administration's proposed regulations. Additionally, Pennsylvania employers can begin to review their employee classifications and employee salaries to assess the potential impact these proposed changes of the Wolf administration could have on their business. Finally, employers should also consider whether it makes sense to submit comments to the department regarding the impact the proposed regulations will have on their business.

Stephen L. Korbel is a shareholder in the employment and labor and public sector groups of Babst Calland. He can be contacted at 412-394-5627 or [email protected].