Important Changes to the Salary Thresholds for Exempt Employees by The Commonwealth of Pennsylvania and the US. Department of Labor
When both the state and the federal governments regulate wages and hours, the employer must follow the law that is most beneficial to the employee. The base salary for exempt employees in Pennsylvania currently follows the Federal salary threshold set in 2004 of $23,660 per year because it is more beneficial than the Pennsylvania limit of $155 per week ($8,060 annually) set in 1977. On September 24, 2019, the United States Department of Labor announced new exempt employee salary limit rules that go into effect on January 1, 2020. Employers must ensure that exempt employees meet this threshold by January 1, 2020 or move their employees to non-exempt status making them eligible for overtime. On October 17, 2019, Pennsylvania also announced its new final rules currently set to go into effect on January 1, 2020 as well. As it is currently set, the state’s threshold amounts remain the same as the federal threshold for the first year of implementation, but beginning on January 1, 2021, if implemented as proposed, Pennsylvania’s rules will be more beneficial to employees than the federal rules and employers will then need to comply with the state’s more burdensome rules. There is a lot to wade though, but an outline of the basic changes is set forth below.
US Department of Labor Rules
Changes, January 1. 2020:
The key provisions of the Federal Rules going into effect on January 1, 2020 are:
- The standard salary level is increasing from $455/ week ($23,600 annually) to $684/week ($35,568/year for a full-year worker); and
- The highly compensated employees salary threshold is increasing from $100,000 to $107,432 per year.
- Employers may use non-discretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10 percent of the standard salary level.
- There are no automatic future increases. However, the DOL has stated the intention to upgrade the limits more regularly.
- There was no change to the duties test.
As you may recall the U.S. Department of Labor attempted to make more sweeping changes to the exempt employee threshold in 2016 that would change the standard salary threshold to $913/ week ($47,467 annually), impose automatic yearly increases, and change the duties test, but this change was eventually enjoined by a Texas Federal District Court. It is possible that this new rule will also see challenges, but with its more modest scope, it is more likely to survive those challenges.
Pennsylvania Rules Changes, January 1, 2020:
The Commonwealth of Pennsylvania is also in the process of changing the state standards along the lines of a 2016 Federal proposal that got stalled by the Texas Federal District Court. This version provided for automatic step increases in the base salary level as well as changes to the Pennsylvania duties test to more closely align it with the federal test. The state submitted its final form regulation to the Independent Regulatory Review Commission on October 17th, 2019 and it is set for public hearing on November 21, 2019. The proposed implementation date is also January 1, 2020. The key provisions of these new Pennsylvania rules are:
- The base salary level will increase to $684/week ($35,568) effective on the date of publication in the PA bulletin (currently aligned with the Federal threshold and effective date);
- A year later (January 1, 2021) the base salary level will increase to $780/week ($40,560);
- Two years after implementation (January 1, 2022) it will increase to $875 per week ($45,500 Annually);
- Three years after implementation (January 1, 2023) the rate will be calculated to equal the 10th percentile of PA workers in the Executive, Administrative, or Professional classifications (this rate will be announced 30 days before it goes into effect).
- The level will then be updated on a triennial basis.
- The employer may satisfy up to 10% of the earnings by non-discretionary bonuses, incentives, and commissions paid annually or more frequently.
- The employer can use any 52-week period to calculate annual income but must do so in advance or the calendar year will apply.
- The duties test for managers, administrators and professionals was updated to be more consistent with, but not identical to, the federal regulations.
It is not yet entirely clear what the differences between the federal duties test and the Pennsylvania duties test will mean for employers and we are still analyzing the large amount of supplemental information provided. However, please review the compensation levels for your exempt employees to assess compliance with these new rules as they escalate up.
If these changes are going to impact any of your employees who are currently salaried exempt workers, there may be strategies for compliance, such as using a different 52-week period to calculate salary or transitioning them to a non-exempt position, that we may be able to help you identify. If you have any questions regarding how these changes may affect your workplace, please reach out to us.