On September 24, 2019, the federal Department of Labor (DOL) announced the issuance of a final rule that, according to the DOL, will “make 1.3 million American workers newly eligible for overtime pay” under the Fair Labor Standards Act (FLSA).
Effective January 1, 2020, the salary threshold for exemption from the FLSA’s minimum wage and overtime pay requirements for executive, administrative, and professional employees will be $684 per week which is equivalent to $35,568 per year. The current salary threshold is $455 per week, approximately $26,000 per year. Under the new rule, employers will be able to use non-discretionary bonuses and incentive pay to satisfy up to 10% of the required salary level so long as such bonuses and incentive payments are made on an annual or more frequent basis. In addition, under the new rule, the total annual compensation required for exemption from overtime as a “highly compensated employee” will be $107,432 instead of the current $100,000. The highly compensated employee must still receive at least $684 per week in salary without regard to the payment of non-discretionary bonuses and incentive payments.
Under the FLSA, an employee is exempt from minimum wage and overtime pay requirements if the employee is: (1) paid on a salary basis; (2) the salary is at least at the legally-required level; and (3) the employee’s job duties satisfy the requirements for a particular exemption such as the executive, administrative, or professional exemption (the “duties test”). The new rule does not make any changes to the duties test for any of the exempt categories. Employees who do not meet the requirements for exemption are entitled to overtime pay for each hour worked in excess of 40 hours in a workweek.
Although the DOL acknowledged that a salary threshold becomes “less effective over time,” the new rule does not provide for automatic increases. The DOL stated that, “the Department reaffirms its intent to update the earnings thresholds more regularly in the future through notice-and-comment rulemaking.” The last time the salary threshold level was raised was in 2004. In 2016, the DOL, under the Obama administration, issued a rule that would have increased the threshold salary level to $47,476. That rule was declared invalid by a federal district court and implementation of the rule was blocked.
Employers now have three months to review their employee classifications and identify current exempt employees who may not be paid at the new salary threshold level and, thus, will need to receive a pay increase in order to remain exempt or be reclassified as non-exempt. In reviewing classifications, employers should be aware that state and local wage and hour requirements may impose a higher salary threshold than the FLSA. Employers should also review their timekeeping and payroll systems to confirm that they will be compliant with the new rule.
