The U.S. Department of Labor (DOL) has announced its final overtime rule, which increases the minimum salary that must be paid to exempt employees to $47,476 a year, or $913 a week, under the Fair Labor Standards Act (FLSA). The final rule is expected to extend overtime protections to 4.2 million workers not currently eligible for overtime, and will result in 35 percent of current full-time salaried workers being eligible for overtime based solely on their salary level.

Overview of the Final Overtime Rule

The key aspects of the final rule, which goes into effect on December 1, 2016, are:

  • Salary Threshold Raised. The final rule raises the minimum salary level for employees in the administrative, executive and professional exemptions to $47,476 a year (up from $23,660 a year).
  • Highly Compensated Employee Salary Threshold Increased. The final rule raises the salary requirement for the highly compensated exemption to $134,004 a year, which represents the 90th percentile of full-time salaried workers nationally.
  • Bonuses/Incentives/Commissions. The final rule will allow up to 10 percent of the salary threshold to be met through payment of nondiscretionary bonuses, incentive pay or commissions, provided that these payments are made on at least a quarterly basis. A catch-up payment can be made at the end of the quarter to ensure the salary threshold is achieved. This only applies to the administrative, executive and professional exemptions; bonus, incentive and commission payments cannot be counted toward the salary threshold for highly compensated employees.
  • Automatic Updates to Salary Levels. Effective January 1, 2020, the salary thresholds will automatically be updated every three years to the 40th percentile of full-time salaried workers in the lowest wage Census region, estimated to be $51,168 in 2020. The highly compensated exemption will automatically increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020. The DOL will post new salary levels 150 days in advance of their effective date, beginning August 1, 2019.
  • No Changes to the Duties Test. The final rule did not make any changes to the primary duties test, which an employee must also meet to qualify as exempt from overtime under the FLSA. The changes to the salary test alone were considered sufficient to expand overtime protections to a large number of U.S. workers.

FLSA Coverage

It is important for businesses, including small businesses and nonprofits, to be aware that the FLSA may apply to its workers. There are two types of coverage under the FLSA:

  1. Enterprise Coverage: A business (and thus all of its workers) is covered by the FLSA if the business:
    1. Has annual sales or revenue of at least $500,000*, or
    2. Is a hospital, school, preschool, government agency or business providing medical or nursing care for residents.

*Nonprofits are not exempt from this requirement, although enterprise coverage only applies to the activities performed for a business purpose (such as operating a gift shop or providing veterinary services for a fee); it generally does not apply to the organization’s charitable activities. 

  1. Individual Coverage: Even if a business is not covered in its entirety, an individual worker is protected by the FLSA if the worker is engaged in interstate commerce or in the production of goods for interstate commerce. For example, an employee who makes or receives interstate calls, transports persons or property to another state, or produces a widget that is sold in interstate commerce is generally covered.

In light of individual coverage, small businesses who do not meet the annual sales threshold of $500,000 should still look at the nature of the work performed in determining whether the FLSA protections extend to their workers.

Recommendations for Employers

Employers essentially have two options for employees currently classified as exempt who do not meet the new salary threshold:

  • Increase the employee’s salary to $47,476 (with nondiscretionary bonuses counting toward 10 percent of the salary), or
  • Reclassify the employee to non-exempt and pay overtime.

This decision may be influenced by how clearly the employee meets the primary duties test, as it may not make sense to increase the salary of an employee whose FLSA exempt status is questionable under the primary duties test. This is a good time for employers to review how the primary duties test applies to all of their exempt employees, and roll out classification changes as part of a larger human resources process.

If converting the employee to non-exempt status, employers should factor in how much overtime the employee is anticipated to work when setting the base hourly rate.

Underestimating or overestimating the amount of overtime a supervisor, for example, will work each year may result in either an increase or decrease in total compensation as a result of the conversion to non-exempt. Employers may want to begin tracking the hours of currently exempt workers whose compensation is below the $47,476 threshold to better understand potential costs.

As a reminder, employers can also implement policies prohibiting non-exempt employees from working overtime. The key is to clearly communicate these policies and enforce them through disciplinary measures. If an employee works unauthorized overtime, the employee must still be paid for the overtime, but the employer may impose appropriate discipline.