The FLSA’s New Salary-Basis Test

By Michael Santo, COSHRM Legislative Director and Managing Attorney at Bechtel & Santo

The year was 1938. Orson Welles’s radio adaptation of “The War of the Worlds” was broadcast, which caused mass panic in the eastern United States. Seabiscuit and War Admiral had their long-awaited race with Seabiscuit beating War Admiral. Superman made his first appearance when Action Comics #1 was published. And the federal Fair Labor Standards Act (“FLSA” or “Act”) passed. Of course, that Act established minimum-wage requirements, overtime pay requirements, record keeping, and youth-employment standards. 

When it passed, the Act required companies to pay all its workers overtime unless the company could establish that: (1) the worker was paid a sufficient salary, which was set at a whopping amount of $30-per-week. This test is known as the salary-basis test; and (2) the worker had to perform actual duties of an executive or administrator. This test is known as the duty-basis test and numerous other tests have been added over the years. For example, there’s also a duty-basis test for home-work employees who make wreaths principally of natural evergreens. Proving, once and for all, that Santa Claus has a good group of lobbyists. 

In sum, to treat a worker as “exempt” (i.e., not entitled to overtime), a company must establish that the worker meets both the salary-basis test and the duty-basis tests. This means that if a company pays its Chief Executive Officer (“CEO”) under the salary threshold, the CEO must receive overtime for hours worked over 40 in a workweek because the company won’t be able to establish that the CEO met the salary-basis test. And, similarly, if the employer pays its door greeter an amount over the salary threshold, the company must pay the greeter overtime unless the employer can establish one of the duty-basis tests; one can probably rule out the wreath-making exemption pretty quickly in that analysis.  

Of course, over the years, there have been various changes to both the duty-basis test and the salary-basis test. For example, in 2004, the Bush administration raised the required salary to $23,660.00. Then, in 2016, the U.S. Department of Labor under the Obama administration published a rule to raise the overtime salary-level threshold to $47,476 annually. The rule was scheduled to take effect Dec. 1, 2016. Shortly thereafter, more than 20 states filed a motion in a Texas federal court to block the new threshold from becoming effective. Just 10 days before the implementation of the new salary test, a federal judge in Texas temporarily blocked it from taking effect. So, at that point, the threshold remained at the $23,660 level. 

Then, in September 2019, the DOL under the Trump administration raised the threshold to $35,568, where it has stayed ever since. But that all may be changing. That is, in August, the DOL proposed an increase to the FLSA’s annual salary-level threshold from $35,568 to $55,068.  But don’t get too attached to that proposed amount. First, the DOL indicated that the actual salary amount will be determined on the date the final rule takes effect. So, it may be higher than that identified amount when it becomes effective. Second, similar to 2016, many observers expect that there will be legal challenges to this increase. So, we’ll have to wait to see what a court does with such challenges. Third, once effective, which assumes that the threshold survives legal challenges, the DOL’s proposed rule has a mechanism for recalculating the amount every three years to reflect current earning data. This means that every three years the amount will go up.  Finally, this is only a proposed rule. So, in short, there’s a long way to go.

All this leads to a critical question regarding the proposed salary threshold – do Colorado employers have to care about it? Well, to borrow everyone’s favorite attorney answer: “it depends.” That is, as you’ll recall, Colorado has its own rules regarding the salary-basis threshold that it established in the Colorado Overtime and Minimum Pay Standards (“COMPS”). COMPS sets the following salary thresholds: 

This means that currently, Colorado employers must pay an employee $50,000 per year to meet the salary threshold and next year that amount will increase to $55,000, which is just a little bit below the currently proposed federal threshold of $55,068. But while the federal proposal has a mechanism for recalculating the proposed amount every three years, COMPS requires Colorado to recalculate the amount every January 1^st (i.e., yearly) by the same Consumer Price Index (“CPI”) that the Colorado minimum wage uses. For example, at the start of 2023, Colorado’s minimum wage went up 8.68% (i.e., minimum wage went from $12.56 in 2022 to $13.65 this year). If that same amount is applied to the 2024 salary threshold in Colorado (i.e., $55,000), the 2025 amount would be around $59,800, with additional increases coming in 2026 and 2027, when the federal rate could be recalculated. In essence, Colorado employers would have dueling salary threshold tests. For example, this year, Colorado will use the state amount, then the next year we will use the federal rate, then the next year we will use the state rate, then...Anyone else feeling like a ping pong ball?!? 

In sum, the federal Department of Labor proposed a new salary test amount that may or may not matter to Colorado employers if it becomes effective. Certainly, something worth monitoring. 

A quick final thought/reminder on wage stuff: in 2019, the Colorado legislature passed the Equal Pay for Equal Work Act. The Act had a number of requirements to ensure that organizations weren’t discriminating against employees on the basis of sex. One of the requirements was that the Act identified that employers could only make a “good-faith defense” when sued for pay discrimination if the employer could establish that within two years before the employer received a lawsuit, the employer completed a “thorough and comprehensive pay audit of its workforce, with the specific goal of identifying and remedying unlawful pay disparities.” The Act, of course, went into effect in 2021, which means that the two years will come up at the end of this year.  Accordingly, organizations should endeavor to complete such a pay audit before working on their holiday wreaths. 

Questions? Email info@coshrm.org