Pennsylvania prepares on its own to address overtime salary test
By Kali T. Wellington-James and Tracey E. Diamond, Pepper Hamilton
Properly classifying an employee’s status under the Fair Labor Standards Act has been a constant source of litigation over the last 10 years. The issue: Was an employee improperly classified as exempt instead of nonexempt? At stake: The possibility of being awarded back overtime pay for hours worked in excess of 40 per week.
Some of these may be legacy claims, lingering as the economy makes its halting recovery from the Great Recession.
Another potential source of these claims, however, may be because of an outdated test used to determine whether an employee is entitled to overtime pay.
No change in OT eligibility
Currently, under both federal and Pennsylvania law, an employee must meet the salary basis test and the duties test to be exempt from overtime under the FLSA’s white collar exemptions. That means they must earn more than a certain dollar amount weekly and perform certain identified duties.
The salary threshold has been stagnant for decades, requiring only that an employee make less than $23,660 annually ($455 per week) to be eligible for overtime pay. This low threshold exempted many middle-class earners from overtime eligibility.
In 2016, the Department of Labor announced new regulations that would have increased the threshold to $47,476 annually ($913 per week), thereby increasing the number of employees who would be eligible for overtime. Those proposed regulations failed to be enacted when a federal court in Texas enjoined the DOL from implementing them, only weeks before the regulations were set to go into effect.
Today, the federal law remains in limbo, with speculation that new regulations will be issued that raise the salary test, albeit to an amount less than the previously anticipated increase. The exact amount remains unclear.
Pennsylvania mulls its own
Now Gov. Tom Wolf has taken up the issue. Earlier this year, Wolf announced plans to issue rules that would increase the salary level from $23,660 annually ($455 per week) to $31,720 annually ($610 per week), beginning Jan. 1, 2020.
The threshold salary would increase again Jan. 1, 2021, to $39,832, followed by a third increase in 2022 to $47,892. After 2022, the salary threshold would increase automatically every three years.
The stated goal of these proposed rules is to strengthen the middle class. Wolf stated, “Pennsylvania’s overtime rules haven’t changed in more than 40 years and workers are paying the price. … I am taking this action to ensure hundreds of thousands of Pennsylvanians who work more than 40 hours a week for the same job receive the overtime pay they have earned.”
What of the duties test?
Employers also should keep an eye out for proposed federal regulations affecting the duties test.
If new regulations provide clarity to the current rule, they could simplify the process for determining whether an employee qualifies for an exemption. However, until material changes are made to the current rule, employers will have to operate in some uncertainty until a new rule is decided in subsequent litigation.
Although neither the federal nor state rules have been passed, employers should monitor any changes that may occur in the near future. While the rulemaking process can be lengthy, it is possible for the DOL to complete the changes before the end of 2018.
State vs. federal
If new salary test rules take effect in Pennsylvania, Keystone State employers would be required to follow Pennsylvania law when determining overtime eligibility for Pennsylvania workers, rather than the federal law. (That assumes federal law will remain less favorable for employees.)
If the salary test threshold is increased, either under federal or state law, it will likely result in either:
- More employees being eligible for overtime or
- Employers increasing workers’ salaries to maintain the exemption status.
Even if these moves cost employers, there may be a silver lining: fewer wage-and-hour actions being brought.
In short, if employees are generally satisfied with their pay and believe that they are being fairly paid for their work, they will be less likely to file expensive and time-consuming wage-and-hour lawsuits.
Steps to take now
For now, employers should begin to review their employee classifications and salaries in order to determine how these proposed regulations may affect their business. Employers will also be afforded a chance to submit public comments during the rulemaking process to convey the impact that the proposals could have on their business.
Employers should also look back at any plans or policies they created in advance of the 2016 DOL proposed regulations to see if they are still applicable under Wolf’s proposals.
Kali T. Wellington-James is an associate in Pepper Hamilton’s Berwyn office. Tracey E. Diamond is of counsel in the firm’s Philadelphia office.