The United States Department of Labor (the DOL) has released its Final Rule that will broaden federal overtime pay regulations to cover up to 1.3 million additional workers who are currently exempt from overtime eligibility. The Final Rule updates the regulations governing which executive, administrative, and professional employees are entitled to minimum wage and overtime pay protections under the Fair Labor Standards Act (the FLSA).
The FLSA requires employers to pay its “non-exempt employees” overtime (1 ½ the workers’ “regular rate of pay”) for all hours worked in excess of forty (40) per week. See 29 U.S.C. § 207. The DOL’s regulations implementing the FLSA sets forth a variety of employment classifications that are “exempt” from the FLSA’s overtime requirement—including employees performing executive, administrative, and/or professional job duties. Since the 1940’s, in order for an employee to qualify as an exempt “white collar” employee, he/she had to meet three “tests”: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) the amount of salary paid must meet a minimum specified amount; and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties (as defined by the regulations).
The DOL last updated these regulations in 2004, setting the minimum salary threshold at $455 per week (or $23,660 annually). In May 2016, the Obama-era DOL attempted change to the overtime rule that would have doubled the minimum salary level for the so-called “white collar” exemption from $23,660 to nearly $48,000 per year. This proposal would have also increased the total annual compensation requirement needed to exempt “highly compensated employees” to $134,004 annually (previously set at $100,000), established a mechanism for automatically updating the minimum salary level every three years and allowed employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the new standard salary level.
The DOL’s new Final Rule, raises the minimum salary level for exempt employees to only $689 per week, or $35,568 annually. The Proposed Rule does have many similarities to the 2016 proposal, including:
- Allowing employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test (provided such bonuses are paid annually or more frequently);
- Increasing the total annual compensation requirement needed to exempt “highly compensated employees” to $107,432 annually (of which $684 must be paid weekly on a salary or fee basis); and
- Not proposing any changes to the standard duties test for the white collar exemptions.
The Final Rule will go into effect on January 1, 2020. Although the Final Rule does not become effective for several months, employers should be proactive and engage their legal counsel to begin planning for the change now. Preparations should include auditing current practices and projecting the cost of change and FLSA compliance under the anticipated new framework. This includes evaluating the possibility and effects of significantly higher operating costs. Our professionals are available to discuss your organization’s current structure, as well as any steps needed to insure compliance with the ever-changing legal landscape facing employers. Contact any one of our Labor & Employment Practice Group professionals with any questions concerning the upcoming transition.