UPDATE:  The Department of Labor and Industry has extended the public comment deadline from July 23, 2018 to August 22, 2018.

The Pennsylvania Department of Labor and Industry (DLI) responded to Governor Tom Wolf’s call to modernize Pennsylvania’s outdated overtime rules for “white collar” employees. On June 12, 2018, the DLI submitted to the Pennsylvania Independent Regulatory Review Commission (IRRC) a proposed rulemaking package that would update the Executive, Administrative and Professional (EAP) exemptions to the minimum wage and overtime requirements of the Pennsylvania Minimum Wage Act (PMWA).

The DLI identified two primary goals associated with its proposal:

1. To update the salary level at which salaried workers may become exempt “to more accurately match the duties they perform”; and
2. To update the duties test for each EAP exemption to be more closely aligned and consistent with the federal regulations interpreting the corresponding exemptions under the Fair Labor Standards Act (FLSA).

Despite these worthwhile goals, the DLI’s initial rulemaking efforts fall well short of the stated aspirations. First, its efforts to update the salary level appear to go too far, ignoring the lessons learned by the U.S. Department of Labor (U.S. DOL) when it attempted to more than double the salary level applicable to the federal EAP exemptions. Second, despite the stated intent to “align” the duties tests with their federal counterparts and to make them “consistent” with federal law, the proposed amendments simply do not achieve that goal. Significant work remains to be done to achieve the DLI’s goals and fulfill its mission to modernize Pennsylvania’s outdated rules.

Updated Salary Level

According to the DLI, the EAP salary thresholds under federal and state law “failed to keep pace with economic growth and the rising nominal salaries of exempt salaried workers.” Indeed, the EAP salary threshold under Pennsylvania law has not been updated since the 1970s. It currently stands at just $250 per week ($13,000 annually) under the so-called “short test” commonly applied under the PMWA.¹ Since this salary threshold is well below the $455 per week ($23,660 annually) threshold imposed by the FLSA, it has little practical impact.

The DLI’s proposed regulations would increase the EAP salary threshold under Pennsylvania law to:

• $610 per week² ($31,720 annually) effective on the date of publication of the final rule in the Pennsylvania Bulletin (which the DLI projects will occur in 2019);
• $766 per week ($39,832 annually) effective one year later; and
• $921 per week ($47,892 annually) effective one year later.

Three years after the date of publication of the final rule, and January 1 of every third year thereafter, the salary threshold would reset automatically to the 30th percentile of weekly earnings of full-time non-hourly workers in the Northeast Census region in the second quarter of the prior year as published by the U.S. DOL, Bureau of Labor Statistics.

The DLI’s proposed regulations provide that up to 10% of the salary threshold may be satisfied by the payment of nondiscretionary bonuses, incentives and commissions that are paid quarterly or more frequently.³

The DLI estimated that the proposed salary increase could impact as many as 460,000 salaried employees in Pennsylvania by 2022.

The DLI’s Regulatory Analysis acknowledges that the U.S. DOL’s attempt to increase the EAP salary threshold from $455 per week ($23,660 annually) to $913 per week ($47,476 annually) was struck down by the United States District Court for the Eastern District of Texas, because the $913 salary threshold was “so high it rendered the duties test for the EAP exemptions irrelevant.”⁴ The DLI did not explain why its proposed salary threshold would not be susceptible to the same defect.

Updated Duties Tests

According to the DLI, “the proposed amendments would align the duties test with the federal regulations in effect since 2004” and make the duties “consistent” with the FLSA regulations. The proposed amendments do not accomplish this objective. For example, the DLI’s proposed regulations:

• require executive exempt employees to “customarily and regularly” exercise discretionary powers, a requirement that does not exist under federal law; and
• require administrative exempt employees to “customarily and regularly” exercise discretion and independent judgment with respect to matters of significance, while the FLSA’s counterpart requires only that the employee’s primary duty “includes” the exercise of discretion and independent judgment with respect to matters of significance.

Moreover, the DLI’s proposed regulations differ from existing federal regulations in that they do not:

• include the FLSA’s acknowledgement that “concurrent performance” of exempt and nonexempt work does not disqualify an employee from the executive exemption (29 C.F.R. § 541.106);
• include any version of the FLSA’s regulation extending the administrative exemption to employees whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment (29 C.F.R. § 541.204);
• include any version of the FLSA’s regulation extending the professional exemption to employees with a primary duty of teaching at an educational establishment (29 C.F.R. § 541.303);
• include any version of the FLSA’s regulation exempting teachers, physicians and lawyers from the salary requirements (29 C.F.R. §§ 541.303(d) & .304(d));
• include any version of the FLSA’s regulation exempting computer professionals who are paid on an hourly basis (29 C.F.R. § 541.400);
• align the outside sales exemption under the PMWA with its federal counterpart (29 C.F.R. § 541.500);
• adopt the streamlined test for the EAP exemptions applicable to “highly compensated” employees with total annual compensation of at least $100,000 (29 C.F.R. § 541.601);
• provide guidance regarding what it means to be paid on a “salary or fee basis”—including whether deductions from an exempt employee’s salary are authorized to the same extent they are permitted under the FLSA (29 C.F.R. § 541.602 - .606); and
• include several of the definitions set forth in the FLSA regulations, including:
  
  • the definitions of “department of subdivision,” “two or more other employees,” or “particular weight”—all of which are relevant for the interpretation and application of the executive exemption (29 C.F.R. §§ 541.103-105);
  • the definitions of “directly related to management or general business operations,” “discretion and independent judgment”—all of which are relevant for the interpretation and application of the administrative exemption (29 C.F.R. §§ 541.201-202); and
  • the definitions of “primary duty,” “customarily and regularly,” “directly and closely related” or any of the other provisions of 29 C.F.R. Subpart H.

In short, the DLI’s proposed amendments fall far short of their aspiration to “align” the duties tests for the EAP exemptions under Pennsylvania with their FLSA counterparts and to make them “consistent.”

It is not clear how these differences would affect the application of the proposed EAP exemptions if they are adopted. In general, where a Pennsylvania law tracks the language of a federal law, Pennsylvania courts will look to federal authority for guidance on the meaning of the Pennsylvania law. See Commonwealth v. Garrison, 386 A.2d 971, 976 n.5 (Pa. 1978). Thus, to the extent the DLI’s proposed regulations are read to “substantially parallel” the FLSA regulations, it is expected that courts will look to the FLSA for guidance (especially considering the DLI’s stated objective of “aligning” the duties test with the FLSA and making them “consistent”), despite the differences between the proposed PMWA regulations and their FLSA counterparts. Commonwealth v. Stuber, 822 A.2d 870, 873 (Pa. Cmwlth. Ct. 2003), aff’d, 859 A.2d 1253 (Pa. 2004).

It is difficult to predict whether courts will be willing to overlook and/or harmonize the many differences between the DLI’s proposed regulations and the existing FLSA regulations, or, contrary to the DLI’s stated objective, whether courts will cite these differences as evidence that the duties tests under the Pennsylvania EAP regulations deviate in material ways from federal law, thus not entitling them to the additional guidance the FLSA provides.

If the DLI truly wishes to align the Pennsylvania duties tests for the EAP exemptions with their federal counterparts to make them consistent, a simpler, more straightforward and proven solution would be to simply incorporate the federal regulations by reference. Other states have accomplished this objective by incorporating by reference the FLSA standards into their laws, while reserving the ability to deviate from the FLSA where justified as a matter of public policy. See, e.g., Ohio Rev. Code § 4111.03 (incorporating FLSA exemptions by reference); Missouri Rev. Stat. § 290.505 (same).

The fact that the DLI desires to align the duties tests with federal law while adopting a higher salary threshold is no impediment to the simplified approach. For example, Alaska adopted the duties tests of the FLSA exemptions by reference, while simultaneously imposing a heightened salary requirement. Alaska Stat. § 23.10.055. These approaches would achieve the DLI’s stated objectives while avoiding the confusion that is likely to result from the DLI’s proposed amendments.

The Road Ahead – Comments and Final Regulations

The DLI’s proposed regulations are expected to be published in the Pennsylvania Bulletin on June 23, 2018. The public will have until July 23, 2018, to submit written comments in support of or in opposition to the proposed amendments. The DLI must consider all comments submitted during the comment period when preparing the final rule.

Comments should be directed to Bryan M. Smolock, Director, Bureau of Labor Law Compliance, at 651 Boas Street, Room 1301, Harrisburg, PA 17121, or via email at bsmolock@pa.gov. Any comment should reference the DLI, the title of the regulation [Amendments to 34 Pa. Code Chapter 231 regarding Overtime Pay], and the identification number of the regulation [Minimum Wage #12-106 (IRRC# 3202)]. All comments relating to the DLI’s proposed amendments will be a matter of public record and will be available on the IRRC’s website. The DLI has not scheduled any public meetings or hearings on the proposed amendments.