On September 24, 2019, the Department of Labor (“DOL”) issued its final rule modifying the exemptions to the Fair Labor Standards Act (“FLSA”) overtime rules. The final rule goes into effect on January 1, 2020, and increases the minimum salary that employees must be paid to qualify for certain white collar and highly compensated exemptions. The new thresholds account for growth in employee earnings since the thresholds were last updated in 2004.
The key regulatory changes embodied in the final rules are:
- The salary threshold for the white collar exemptions (executive, administrative, professional, computer-related professional, and outside sales) will increase from the currently enforced $455 per week (or $23,660 annually) to $684 per week (or $35,568 annually). This increase is consistent with the proposed rule and is considerably less than the $913 per week (or $47,476 annually) that was part of the Obama-era rules that never took effect.
- The salary threshold for the highly compensated employees will increase from the currently enforced level of $100,000 to $107,432 annually. This increase is lower than the $147,414 threshold proposed by the DOL in March. To be exempt as a highly compensated employee, the employee must regularly and customarily perform one or more of the duties of an executive, administrative or professional employee and the employee must earn at least $107,432, which includes at least $684 per week on a salary basis.
- The salary thresholds for the white collar and highly compensated exemptions will not be subject to automatic increases. The DOL, however, committed to more regularly updating the salary thresholds through the notice and comment process.
- Employers will be permitted to use non-discretionary bonuses and incentive payments paid at least annually to satisfy up to 10% of the standard salary level. Under the preexisting rules, employers were not permitted to include any types of bonuses or incentive compensation in calculating whether an employee’s compensation meets the white collar salary threshold. Under the new rules, employers can satisfy up to 10% of the new white collar salary threshold (i.e. $3,556.80 per year) through non-discretionary bonuses and incentive payments and commissions paid at least annually. The new rule also allows employers to make catch-up payments to bring employees up to the salary threshold if the catch-up payments are made within one week of the last pay period of the end of the year. Catch-up payments will be credited towards the prior year and will not count towards the threshold for the year in which it is paid.
- The DOL is maintaining a special salary level for employees in U.S. Territories, $380 per week in American Samoa and $455 a week for Puerto Rico, the U.S. Virgin Islands, Guam and the Commonwealth of the Northern Mariana Islands. The DOL maintains a special base rate threshold for employees in the motion picture producing industry in the amount of $1,043 per week (or a proportionate amount based on the number of days worked).
- The new rule will make no changes to the duties tests for the white collar or highly compensated exemptions.
Hall Estill recommends employers evaluate employees who are classified as exempt, to ensure such employees meet both the preexisting duties test and the new salary thresholds. Employees who do not meet the salary threshold must either be reclassified as non-exempt, or increase their compensation to meet the new thresholds.
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