Patricia C. Collins, Antheil Maslow & MacMinn

On Sept. 24, the U.S. Department of Labor (DOL) announced a new final rule regarding eligibility for overtime pay (federal final rule). The rule requires employers to revisit their classifications of employees as exempt in order to ensure compliance. Meanwhile, Pennsylvania has not issued a final rule regarding its proposed rulemaking that would dramatically increase salary requirements and revise the duties test for exempt employees.

The Fair Labor Standards Act (FLSA) 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 U.S. Department of Labor announced rules in 2016 to dramatically increase the salary threshold in order for certain categories of employees to meet the standards for exemption from federal overtime requirements. The rules were met with litigation and a stay of their enforcement. The new federal final rules do not impose as dramatic a salary increase in order to meet the test.

Effective Jan. 1, 2020, the federal final rule raises the salary threshold from $455 a week to $684 a week, or $35,568 a year. In calculating salary, employers may now use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the salary requirement. The rule increases the salary level for "highly compensated employees" to $107,431. The DOL will revise salary levels in the future pursuant to the normal rulemaking procedure—increases are not automatic under the federal final rule. Of course, employers must continue to ensure that the employee's positions meet the substantive duties tests in order to meet the standards of exemption for the overtime requirements.

What then, will become of Pennsylvania's not-yet-final rules on the same topic? The Pennsylvania Minimum Wage Act (PMWA) and its regulations operate like the FLSA to require employers to pay minimum wage and overtime rates to employees unless they are exempt. Pennsylvania's Department of Labor and Industry proposed rules in late 2018 that change both the duties and salary tests (Pennsylvania proposed rule). As of this writing, Pennsylvania's Department of Labor and Industry has not proposed any final rules on this topic. If the Pennsylvania proposed rule becomes final, it will create substantial difficulties for Pennsylvania employers.

With regard to the salary test, for each exemption, executive, administrative and professional, the Pennsylvania proposed rule seeks 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 Pennsylvania proposed 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.

This proposed rule was quite similar to the 2016 DOL regulation, but is dramatically different from the federal final rule just announced. Under the federal regulation, the salary requirement will only comply with the Pennsylvania salary requirement for the first year after enactment of the Pennsylvania rule. Thereafter, the salary requirement increases dramatically, and in a way that changes the manner in which an employer operates its business and classifies its employees. This difference will place Pennsylvania employers in a difficult bind with regard to compliance. The Pennsylvania proposed rule does allow up to 10% of the salary amount to include nondiscretionary bonuses, inventive or commissions. The current regulations do not contain this provision.

Further, the automatic increases in the following years require Pennsylvania employers to constantly re-evaluate their compliance, whether certain employees meet the exemption requirements, as well as their compensation structure in general. To undertake this type of evaluation on an annual basis is disruptive both to the business and the career paths of its exempt employees.

Pennsylvania employers who comply with the federal final rule are, for now, also complying with existing Pennsylvania law, except for some differences relating to computer and outside sales employees. Should Pennsylvania adopt the Pennsylvania proposed rule, the burdens of compliance will increase dramatically. Further, those rules are likely to be met with legal challenges that will create uncertainty as to effective dates regarding the rules. Employers would be wise to obtain a general understanding of steps for compliance should the Pennsylvania proposed rule become final.

Employers should take measures now to ensure compliance with the federal final rule by the end of the year. The first step is to identify any employees who are classified as exempt but are making less than $422 a week, and develop a plan to reclassify those employees, or revise their compensation. This is a good time to revisit the job duties of those employees to ensure that they meet the applicable standards for exemption in terms of their duties as well as their salary. This is also a good time to review overtime policies to ensure appropriate record-keeping, efficient use of overtime and compliance with applicable law.

Patricia Collins is a partner and employment law chair with Antheil Maslow & MacMinn, based in Doylestown. Her practice focuses primarily on employment, commercial litigation and health care law. To learn more about the firm or Collins, visit www.ammlaw.com.