On September 24, 2019, the U.S. Department of Labor (DOL) issued its final rule on overtime compensation, updating the regulations governing the exemption of “white-collar” employees from the minimum wage and overtime provisions of the Fair Labor Standards Act (FLSA). The new rule will go into effect on January 1, 2020. This leaves employers less than three months to conduct audits and census reviews and make the necessary changes to ensure they are properly paying everyone eligible for overtime.
Generally, under the FLSA, employers are required to pay workers overtime wages for time worked in excess of 40 hours in a work week. The FLSA includes some exemptions intended to exclude certain “white-collar” workers from the overtime requirements. For an individual employee to qualify for one of the white-collar exemptions under the FLSA he or she must meet the following requirements: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction based on quantity or quality of work, (2) the amount of the salary must meet a minimum amount under a salary level test, and (3) the employee’s job duties must primarily involve certain executive, administrative, or professional duties as outlined under the job duties test. Both the salary level test and the job duties test are considered when determining whether an exemption applies to an individual employee.
Currently, for an employee to qualify for one of the white-collar exemptions under the salary level test, he or she must be earning at least $23,660 per year. This salary threshold was last updated by the George W. Bush administration in 2004, despite efforts by the Obama administration to double the threshold to $47,476 in 2016. Before the Obama administration’s proposed changes could take effect, 21 states and numerous national business groups filed suit against the DOL in the U.S. District Court for the Eastern District of Texas. The court granted a preliminary injunction blocking the implementation of the proposed rule and ultimately found the rule to be unlawful.
The New Rule
In March of 2019, the Trump administration proposed new updates to the rule to increase the minimum salary threshold. Under the DOL’s announced final rule, an employee must earn a minimum annual salary of $35,568 per year (or $684 per week) to qualify under the salary level test for the FLSA’s white-collar exemptions. Employees still must also qualify for exemption under the job duties test, as the job duties test remains unaltered by the new rule.
Although the highlight of the new rule is the increased salary threshold, the final rule totals over 200 pages and touches on several smaller aspects of the white-collar exemptions that will also affect employers. For example, under the new rule, employers are allowed to count a portion of nondiscretionary bonuses and incentive payments (like commissions) as up to 10% of a worker’s annual salary towards the $35,568 threshold, so long as such payments are made at least once per year. Additionally, the new rule raises the “highly-compensated” employee annual salary threshold from $100,000 to $107,432 for such an employee to qualify for the exemption. Generally, the “highly-compensated” employee exemption covers well-paid employees who perform some managerial duties. These employees face less stringent requirements under the duties test for being exempt from overtime.
Action Steps for Employers
Employers would be wise to begin evaluating their workforce as soon as possible to determine what changes need to be made ahead of the DOL’s approaching January 1, 2020 deadline. Specifically, employers should carefully review their current exempt employees’ to determine which workers may be eligible for overtime wages under the new regulations. Although the most pressing changes will need to be made with regard to employees currently classified as exempt and whose compensation is now beneath the $35,568 salary threshold, employers should also take advantage of the opportunity to make sure all their employees are properly classified by conducting a comprehensive FLSA audit/census review of all employees. It is important for employers to keep in mind that salary level is just one of the criteria for exemption. Proper classification under the FLSA also requires an individualized analysis of the job duties of each individual employee. Because the job duties test can be difficult to apply within the confines of the DOL regulations, employers should enlist the help of legal counsel at the outset of an FLSA audit to ensure that all positions are correctly categorized.
Additionally, employers will need to make prompt decisions regarding pay changes or reclassifications. Deciding whether to reclassify an affected employee as a nonexempt hourly worker or give the employee a raise that keeps him or her eligible for a white-collar exemption can have complex implications for an employer. For example, when reclassifying employees, employers must also develop a plan to monitor hours. Legal counsel can assist in evaluating the available options and weighing the associated costs and benefits to help employers make individualized decisions that will be best for their particular business.