Pennsylvania Proposes to Further Increase Salary Limits for Overtime Exemptions

At the end of September, the U.S. Department of Labor announced a final rule amending the Fair Labor Standards Act (FLSA) regulations to increase the minimum annual salary for most exempt employees paid on a salary basis from its current level of $455 per week (or $23,660 per year) to $684 per week (or $35,568 per year). That regulation, which goes in to effect January 1, 2020, was the subject of prior Client Alerts. 

The Pennsylvania Department of Labor and Industry is now seeking to clarify the definitions of executive, administrative, and professional (EAP) salaried workers who are exempt from receiving minimum wage and overtime pay to comport with the updates to the duties test in the current regulations interpreting the FLSA. The Department is also seeking to update the salary threshold to qualify for the EAP exemption, which includes addressing incentive pay (it can count toward 10% of the salary threshold) and adopting a mechanism for the salary threshold to be adjusted on a triennial basis.

Under Pennsylvania's proposed rule, the minimum salary threshold for EAP employees would increase according to the following schedule:

• $684 per week ($35,568 per year) on the date of publication. Note: this is the same salary threshold that takes effect under the federal regulations on January 1, 2020.
• $780 per week ($40,560 per year) one year after the date of publication.
• $875 per week ($45,500 per year) two years after the date of publication.
• A rate equal to the 10th percentile of Pennsylvania workers who work in overtime-exempt EAP occupations three years after the date of publication, and January 1 of each third year thereafter.

The FLSA permits states to adopt laws that provide employees greater protection than what is afforded under the FLSA. Pennsylvania's Independent Regulatory Review Commission (IRRC) has the authority to reject any regulations proposed by the Department that it deems are not in the public interest. The IRRC will review this proposed regulation at the end of November. If approved, the Attorney General conducts a final review before publication and ultimate implementation.

The Department previously proposed regulations that would have raised the minimum salary level to nearly $48,000, but the IRRC rejected the rule due to a number of concerns. The current version aims to address those concerns. The Department estimates 143,000 Pennsylvania workers will benefit from the new regulations, meaning their employers will have to either raise their salaries or reclassify them as nonexempt and pay overtime. The estimated cost to businesses is an average of $210-$279 per affected worker each year.

As MacDonald Illig has pointed out in previous Client Alerts on this topic, employers have a range of options for responding to this new overtime rule. If an employee is newly entitled to overtime pay, an employer may:

• Increase the salary of the employee who meets the duties test to at least the new salary level to retain exempt status;
• Pay an overtime premium of one and one-half times the employee's regular rate for an overtime hours worked;
• Reduce or eliminate overtime hours or implement controls to limit overtime hours;
• Reduce the amount of pay allocated to base pay (provided that employees still earn the applicable hourly minimum wage, and add pay to account for overtime for hours worked, thereby holding total weekly pay constant); or
• Some combination of the above

If you have questions about the impact of Pennsylvania's final regulation or how to be prepared to implement any of the requirements mentioned above, contact a member of MacDonald Illig's Employment and Labor Practice Group.