The U.S. Department of Labor (DOL) released a final rule that will raise the salary threshold for overtime exemptions. Most workers will need to earn at least $35,586 annually, or $684 per week, for exemption from FLSA overtime requirements under one of the so-called “white collar” exemptions. The salary threshold is currently $455 per week, or $23,660 a year, and has not been updated since 2004.

In a boon to many employers that rely on incentive-based pay, up to 10 percent of the salary threshold may be met by non-discretionary bonuses, commissions, or incentives that are paid at least annually. If the salary at the end of the year does not meet the minimum salary threshold (because the employee earned a smaller bonus than expected, for example), the employer may make a final payment to make up the difference no later than the first pay period after the end of the year. The existing regulations provide a similar approach for employees who fall under the highly compensated exemption, but the expansion to additional categories of exempt employees is new.

Finally, the regulations raise the salary threshold for the highly compensated employee exemption to $107,432. The regulations make no changes to the duties tests, which all employees must still satisfy to be exempt, and do not change the existing rules for those exemptions that are not dependent on the salary threshold, such as teachers, doctors, lawyers, and outside sales employees. The final rule does not provide for automatic updates to the salary threshold, so any future changes will require additional rulemaking.

As discussed in our prior alert, this final rule has an embattled and dramatic history. The Obama administration attempted to raise the minimum salary threshold even higher to approximately $47,000 in 2015, only to be enjoined by a federal court before it was scheduled to take effect.

The DOL projects that this boost to the minimum salary threshold will extend overtime pay eligibility to 1.2 million workers, absent changes employers make to raise the pay of those employees. Starting January 1, 2020, employers will have to increase the salary of any employee who meets the duties test to at least the new salary level to maintain their exempt status or pay those employees overtime for hours beyond 40 in a workweek.

The rule could face legal challenges from both employers arguing that this change is too aggressive and labor advocates arguing that this change is not enough to address changes in the cost of living and inflation. The rule will certainly face political scrutiny as the 2020 presidential campaigns heat up. Nonetheless, employers should prepare now for it to take effect in January. Additionally, many states have set higher minimum wage and overtime thresholds that employers must also follow.