The U.S. Department of Labor unveiled the final version of its overtime exemption rule on Tuesday, September 24, 2019, setting the salary threshold workers will need to exceed to qualify for the Fair Labor Standards Act (FLSA) “white collar” exemptions at $35,568 per year, or approximately $684 per week.

The new rate takes effect January 1, 2020.

In order to be exempt from overtime under the federal FLSA, employees must be (1) paid a salary of at least the threshold amount, and (2) also meet certain duties tests. If employees are paid less than the threshold or do not meet the duties tests for exemption, those employees must be paid 1.5 times their regular hourly rate for any hours worked in excess of 40 hours per workweek.

In 2016, the DOL sought to double the previous salary threshold ($23,660 annualized, or $455 a week), but that provision was enjoined by Judge Amos Mazzant in the U.S. District Court for the Eastern District of Texas before it could take effect and an appeal of the injunction remains pending in the Fifth Circuit.

Besides raising the salary threshold, the new rule raises the so-called “highly compensated worker” threshold from $100,000 to $107,432. The proposed version of the DOL's rule had set that number at around $147,000. The highly compensated employee exemption covers well-paid workers who perform some managerial duties. Employees designated as highly compensated face less stringent requirements for being exempt from overtime.

The new rule will likely result in employers reclassifying more than 1,000,000 exempt workers to nonexempt status and to raise salary for others above the new threshold.

Here are some “nuts and bolts” of the new rule for employers as well as tips for how to address the new rules:

  • Under the new rule, nondiscretionary bonuses and incentive payments (including commissions) paid on at least an annual basis may be used to satisfy up to 10 percent (10%) of the standard salary level.
  • The new rules raise the threshold for overtime exemptions to a minimum salary of $35,568 per year, as well as the threshold for highly compensated employees from $100,000 a year to $107,432 (of which $684 must be paid weekly on a salary or fee basis). This increase is approximately $40,000 less than what DOL initially proposed, and represents the 80th percentile (rather than the 90th percentile) of all full-time salaried workers’ earnings nationwide.
  • The “white collar” exemptions require employees to perform certain duties and to earn at least the salary threshold. However, highly compensated employees may be eligible for exempt status if they meet the reduced duties test, as follows:
  1. The employee’s primary duty must be office or nonmanual work.
  2. The employee must “customarily and regularly” perform at least one of the bonafide exempt duties of an executive, administrative, or professional employee. (Note, that the new rule does not alter the duties tests.)
  • The new DOL rule does not include the 2016 proposal to automatically adjust the salary threshold every three years to the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region. Instead, the new rule does not provide for automatic adjustments to the salary threshold. However, it is stated that the DOL “intends to update these thresholds more regularly in the future,” according to the final rule.

In addition to reviewing exempt employee pay, employers should assess their employees’ job duties to make sure they satisfy one or more of the “white collar” exemption criteria:

  • Executive Exemption: the employee’s primary duty is managing the enterprise, a department, or a subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have hiring and firing authority (or at least input).
  • Administrative Exemption: the employee’s primary duty must be office or nonmanual work that is directly related to the management or general business operations of the employer or the employer’s customers. The employee’s duties must include exercising discretion and independent judgment with respect to “matters of significance.”
  • Professional Exemption: the employee’s primary duty must be work “requiring advanced knowledge” in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction or study.

Employers can prepare to comply with the new rule by pulling data for exempt workers earning below the new threshold, to identify whom those employers might reclasisify to nonexempt or give a salary increase. Indeed, employers may need to take proactive steps regarding the financial impact for changes in labor costs necessitated by the new DOL rule.

Employers can further assess whether to increase employee salaries above the new threshold, or whether it is more financially feasible to reclassify an employee as nonexempt and pay overtime. Employers who reclassify employees to nonexempt status need to take careful steps to track affected workers’ work time and pay overtime premiums for all hours worked beyond 40 hours in a workweek.

Employers should be sure to communicate clearly the basis for the reclassification to ensure reclassified employees are aware that they are not being demoted, and that the changes are based upon the new DOL rule. And, of course, employers should provide training and instruction regarding systems for time-keeping, tracking overtime, and paying bonuses, and develop plans to manage or limit overtime hours by reclassified nonexempt employees, if needed.

Finally, be aware that some states, including California, already have stricter parameters in place for exempt salary minimums. As such, these jurisdictions remain largely unaffected by the recent change.