The Proposed Highly Compensated Exempt Employee Test Under the FLSA

“Money may not buy happiness, but I'd rather cry in a Jaguar than on a bus.” 

― Françoise Sagan

In 2004, the Department of Labor (“DOL”) created the Highly Compensated Employee (“HCE”) test for exemptions from the Fair Labor Standards Act (“FLSA”). The same test is used under the Service Contract Act (“SCA”) too. This test allowed the employer to classify their employees making above a certain amount as exempt if they perform at least one of the exempt tasks under the Executive, Administrative, or Professional exemptions. Now DOL wants to raise the compensation threshold for the HCE to $147,414 a year.

In 2004, the final rule set the HCE test at $100,000 salary to qualify for the relaxed duties test. However, in 2016 the DOL revised the rule and raised the HCE threshold from $100,000 to $134,004. At the same time the DOL raised the regular salary threshold for the FLSA exemptions to $913 per week. This was a sharp increase from $499 per week threshold that was in place between 2004 and 2016. This rule was challenged in Nevada v. United States Department of Labor, 218 F.Supp.3d 520 (E.D. Tex. 2016) because the threshold limit effectively supplanted the duties test. Too many workers were excluded from the exemption on account of the salary threshold being raised to $913 when the duties test should be the priority. In other words, raising the salary threshold to $913 was so extreme that it supplanted the duties test for the executive exemptions, which was not within the DOL’s delegated authority. This ruling also enjoined the use of the DOL’s automatic updating mechanism which set the salary threshold every three years at the 40th percentile of fulltime salaried workers’ salary in the lowest wage region of the country. As a result, the DOL asked the court for time to revise their rule.

On March 7th, 2019 the DOL proposed a new rule that would set new salary thresholds for the FLSA exemptions. 84 FR 10900. This rule was posted on the Federal Register and comments closed on May 21st, 2019. In the Background, the DOL spoke about the 2016 rule and, having performed an audit, concluded that the increase from $499 to $913 per week would have excluded over four million employees who would have otherwise qualified under the duties test. 84 FR 10900. So instead of using the salary standard of the 40th percentile in the 2016 rule, the DOL revised their method to the 20th percentile of employees. This brings the threshold up to $679 per week. The 2004 final rule also used the 20th percentile method for the salary threshold.

Conversely, the DOL did not change their method for the Highly Compensated Employee test from the 2016 method. They calculated the average salary of full-time salaried workers nationally and took the 90th percentile as their threshold. This increased the salary from $134,004 in 2016 to $147,414 in 2018. It seems strange the DOL changed the other methods to calculate the salary while leaving the HCE test as is. However, two motivations may be that the court in Nevada did not discuss the Highly Compensated Employee test and, during an audit, the DOL determined that it would only exclude 201,100 employees who otherwise would be exempt. This number is much smaller than the number of employees excluded by the 2016 revision of the standard salary basis test. The holding in Nevada prohibited the salary standard because it effectively supplanted the duties test. Here, because the number of excluded employees is relatively small, the reasoning behind the Nevada decision may not be applicable. In addition, it seems the reasoning behind the 90th percentile method is that it is modeled after a similar percentage of employees to the 2004 final rule that would qualify for the HCE relaxed duties test. 81 FR 32391. While the 2004 rule did not state the method for calculating the HCE salary threshold, the DOL calculated the percentage of people that qualified in 2004 and created a method that replicated a similar amount. If a challenge to this new rule were to come, these are two of the arguments that the DOL would use to defend their rule.

And keeping the highly compensated level high at $147,414 is a sop of sorts to organized labor. Traditionally conservative unions —like those who represent fire fighters and police officers, who earn significant overtime and may well qualify for the HCE test, albeit  subject to the so-called first responder rule — likely will appreciate the proposed higher compensation caps. 

Comments on the proposed rule have closed but public comments are available to view on the Office of the Federal Register’s website under the RIN # 1235-AA20. For more information you can also read about the proposed rule and the text on the same webpage. https://www.regulations.gov/document?D=WHD-2019-0001-0001.