This article, written by NFDA General Counsel T. Scott Gilligan originally appeared in the October 3, 2019, issue of the Memorial Business Journal
On September 24, the U.S. Department of Labor (DOL) announced a final rule that raises the salary level test for exempt employees from the current level of $23,660 to $35,568. That increase, which will take effect January 1, 2020, could impact funeral homes and their employees in 16 states.
The salary level test is one of the three qualifications the DOL uses to determine whether an employee qualifies for the white-collar exemption from the overtime provisions of wage and hour laws. As explained below, funeral directors in the 16 states with higher-education requirements for licensing may qualify as “professionals” under the white-collar exemptions. Starting January 1, those employees will need to be paid a minimum of $35,568 or $684 a week in order to retain the professional classification. If the employees do not receive that minimum amount, they will be converted to hourly employees who are entitled to overtime premiums when working more than 40 hours per week.
This DOL action is the follow-up to the failed attempt of the Obama administration to raise the salary level to $47,476. Back in 2016, the Obama DOL promulgated a regulation that more than doubled the $23,660 salary level (last set in 2004). However, that regulation was blocked by a federal district court, and the Trump administration decided to issue a new regulation rather than defending the Obama regulation on appeal.
In 2016, NFDA filed comments with the DOL objecting to the $47,476 salary level given its dramatic increase and the fact that it did not take into effect cost-of-living differences throughout the United States. NFDA also filed comments with the Trump DOL raising those same concerns when it proposed to start over and issue a new regulation. Fortunately, the new regulation addresses NFDA’s concerns in that the new salary level should have a minimal impact on funeral homes.
As mentioned earlier, this regulation could impact funeral directors in 16 states. Currently, the DOL recognizes that directors who work in states requiring a bachelor’s degree can qualify as “professionals” under the white-collar exemption.
Two states, Minnesota and Ohio, meet those qualifications. However, several court rulings have found that funeral directors in states requiring three years of post-secondary education, including the successful completion of a mortuary science program, can qualify as professionals. Those 14 states include Idaho, Iowa, Michigan, Montana, Nebraska, New Jersey, New Mexico, New York, North Dakota, Pennsylvania, Rhode Island, South Dakota, West Virginia and Wisconsin. As a result of those court rulings, some funeral homes in those states compensate funeral director licensees as exempt salaried employees.
When the DOL proposed the $47,476 salary level in 2016, it changed the methodology under which it had calculated salary levels in the past. This change in methodology was one of the reasons the federal district court in Texas overturned the regulation. To avoid a similar fate, the DOL in 2019 returned to the methodology it had used in 2004 when it last updated the salary level test.
Basically, the DOL determined the new salary level test by calculating the salary level for full-time workers with earnings in the top 20th percentile from July 2018 to June 2019 in the lowest-wage census region (currently the South) and in the retail sector nationwide. This led to a calculation of $684 a week or $35,568 annually as the new salary level test.
Using the lowest-wage census region addressed one of NFDA’s principal concerns – that wages differ widely by region in the United States. For example, in the 16 states in which funeral directors may qualify as professionals, the average mean salary in May 2017 was as high as $70,090 in New Jersey but as low as $47,680 in West Virginia. By employing wage calculations from the lowest-wage area, the DOL protects businesses in states with lower costs of living from being disproportionately penalized by the new salary level test.
As for the projected impact of the new salary level when it takes effect January 1, the DOL estimated that 1.3 million salaried employees may be converted to hourly employees because of the increase in the salary level test. This is about 31% of the estimated 4.2 million workers who would have been converted to hourly workers had the Obama DOL regulations taken effect in 2016.
As far as the impact on funeral service, as noted above, the average mean salary for funeral directors as of May 2017 in the lowest-wage regions of the 16 states in which funeral directors may qualify as professionals was $47,680 in West Virginia. That means the average mean wage for the lowest-paying state was $12,112 above the new salary level of $35,568. While the new salary level could cause entry-level funeral directors in lower-wage states to be converted to hourly employees, the $35,568 salary level should have a minimal impact on funeral service.
Another new wrinkle in the regulation is a provision that allows up to 10% of the total wages received by salaried employees to be in the form of commissions and bonuses. The new regulation will also permit employers to make a final “catch-up” payment within one pay period after the end of the year in order to bring an employee’s compensation up to the salary level test. Therefore, if a funeral director being paid a salary fell below the salary level of $35,568 during a particular year, the funeral home could gross up the previous year’s salary with a bonus payment not to exceed 10% of the employee’s salary paid within the next pay period in order to maintain the exemption.
The DOL rejected the proposal to index the salary level for inflation and automatically update it each year. In addition, it declined to adopt a regularly scheduled review. Instead, it indicated its intent to regularly review the salary level but without establishing a fixed timeline for future reviews.