Patricia C. Collins, Antheil Maslow & MacMinn

In 2016, the U.S. Department of Labor proposed changes to regulations regarding exemptions from the overtime and minimum wage requirements of the Fair Labor Standards Act (FLSA). The proposed changes nearly doubled the salary requirement to qualify for these exemptions. Employers hurried to change policies and reclassify employees in order to meet the Dec. 31, 2016, deadline to comply with the new salary requirement. In late 2016, a federal court imposed an injunction on the imposition of those rules, and there the new regulations died (more at the hands of the Trump administration than as a result of legal challenges). Among other observations, the U.S. District Court for the Eastern District of Texas concluded that the injunction was necessary because the new salary requirement was so high that it rendered the duties test “irrelevant.”

The proposed change was dramatic, and would have required significant policy and personnel changes. Now, Pennsylvania is taking on those salary requirements in a less dramatic, but no less significant way.

On June 23, Pennsylvania's Department of Labor and Industry (PLI) proposed rules regarding exemptions from the overtime and minimum wage requirements of the Pennsylvania Minimum Wage Act (PMWA). Like the FLSA, the PMWA and its regulations require employers to pay minimum wage and overtime rates to employees unless they are exempt from those requirements. The statute and regulations create exemptions, and two tests to determine whether an employee is exempt or nonexempt: the duties test and the salary test.  The proposed rule changes are to both the duties and salary tests. The changes do not address areas of significant difference between the PMWA and the FMLA: the computer professional, outside sales and highly compensated employee exemptions.

With regard to the salary test, for each exemption, executive, administrative and professional, the regulations seek to impose a higher salary test that increases over time. Currently, the salary test under the PMWA and its regulations is very low, $155 a week. Under the proposed new rule, in the first year, the salary requirement is $610 a week, or $31,720 a year. A year later, the minimum will increase to $766 a week or $39, 832 a year. In the third year, the salary minimum will increase to $921 a week or $47,892 by the end of a three-year period. After three years, the salary minimum is calculated as “the 30th percentile of weekly earnings of full-time nonhourly workers in the Northeast Census region in the second quarter of the prior year” as published by the U.S. Department of Labor.

The changes to the duties test could likewise prove significant. For each exemption, the current regulation only requires that the employee's duties “consist of” the duties specific to the exemption. The current regulation also includes a test for evaluating whether the exemption applies when the employee has mixed duties. The new rule eliminates that test, and removes the phrase “consists of” from the rule. The elimination of the phrase “consists of” could prove a meaningful change. Small employers, for example, often have employees who wear many hats. Small employers with multi-tasking employees will need to consider whether those employees still qualify for the exemption should these rules become final.

The comment period for the regulations will end on Aug. 23 (an extension from the July 23 deadline), and employers can expect a final rule in 2019.

Employers will inevitably challenge the new salary test on the same basis as the challenge raised against the federal proposed rule. The now-abandoned proposed federal rule would have immediately imposed a $47,476 salary minimum. The previous (and current) minimum was $23,660. The Eastern District of Texas, applying the federal standard announced in Chevron, U.S.A. v Natural Resources Defense Council, 467 U.S. 837 (1984), held that the new salary rate was so high that it essentially made the duties test irrelevant. In this way, the rule exceeded Congress' intent in creating a duties-based test for exemption from the requirements of the statute.

The Pennsylvania proposed rule will, over time, increase the salary minimum to a figure five times more than the current minimum. The proposed rule does not attempt to address the concerns that caused the Eastern District of Texas to strike the federal regulations. A court challenge will inevitably raise the same issues, even with the phased-in salary change. As the Pennsylvania Supreme Court noted in Seeton v. Pennsylvania Game Commission, 937 A.2d 1028, 1037 n. 12 (Pa. 2007), its approach to agency interpretations of statutes is indistinguishable from the Chevron analysis employed by the federal courts.

Several practical considerations emerge for Pennsylvania employers. Employers will need to evaluate their exempt employees and the salaries paid to them, and plan for the increase in salary requirement over time. The gradual increase will not make planning easier, as a raise in salary from $31,000 to $47,000 for a specific position is dramatic. Employees may well be exempt in year one, and not exempt in year three.

Further, certain differences between the federal rule and Pennsylvania proposed rule create uncertainties. For example, Pennsylvania employers have often struggled with the omission of the computer exemptions. These proposed rules do not address that issue. Where the asserted purpose of the rules is to “align the duties test with the federal regulation in effect since 2004,” this omission seems significant. This is not the only difference between the current federal rule and proposed Pennsylvania rule. The FLSA regulations permit the presence of mixed exempt and nonexempt duties, and specifically address teachers, while these proposed rules do not. Further, the new rules do not align the Pennsylvania rules with the federal rules regarding outside sales and highly compensated employees. These differences leave Pennsylvania employers with the same struggles as exist currently—how to comply with Pennsylvania's more stringent duties test.

Pennsylvania employers should prepare for the same chaos that existed during the federal rulemaking process: uncertainty during court challenges, revisions to job descriptions, salaries, exempt status and the availability of overtime hours for employees, and uncertainty as to computer employees, outside sales and mixed-duty employees.

Patricia C. Collins is a partner with Antheil Maslow & MacMinn, based in Doylestown. Her practice focuses primarily on employment, commercial litigation and health care law.