Millions of Americans have become working long hours without extra pay, the result of an overtime salary cap set way back in 1975, almost 45 years ago. Over the last five years, upping this limit has caused contentious debate.

The Department of Labor’s final rule on the issue rescinds a prior 2016 final rule and replaces it with a new rule setting a salary threshold of $35,568 for workers eligible for overtime pay. This adjustment expands the number of workers eligible for overtime by an estimated 1.3 million individuals from the enforced salary level set in 2004, far fewer than the estimated 4 million workers that would have been covered in the 2016 rule.

Under the final rule, certain salaried W-2 employees earning less than $35,568 a year qualify for overtime. The new limit does not change with the cost-of-living, ensuring that this contentious battle will be back as inflation whittles away at the real value of the salary threshold. The change goes into effect January 1, 2020.

Background

This rule has been a long time coming. Under the existing rule set in 2004, only workers earnings less than $23,660 a year were eligible for a 50 percent overtime pay bump for work in excess of 40 hours a week.

The final rule does not increase the threshold by the rate of inflation from the 1975 level—which would equate to over $55,000–or even the DOL-set adjusted rate of $47,476 enacted in December 2016, and subsequently challenged. A judge invalidated the 2016-adjusted rate in 2017 saying the change needed congressional approval.

Practical considerations for employers

The DOL administers the Fair Labor Standards Act (FLSA), which requires covered employers to pay their employees at least the federal minimum wage for all hours worked, and overtime premium pay of at least 1.5 times the regular rate of pay for all hours worked over 40 in a work week, excepting certain exemptions.

Employee exemption. Employees making more than the salary cap are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the multiple exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption. This includes employees whose primary duty includes performing office or non-manual work. Non-management production line workers an employees who perform work involving repetitive operations with their hands, physical skill, and energy cannot be exempt.

To qualify for an exemption, employees must meet certain tests regarding their job duties and generally be paid on a salary basis at least the amount specified in the regulations. Some “white collar” employees, such as business owners, doctors, lawyers, teachers, and outside sales employees are not subject to the salary tests. Others, such as academic administrative personnel and computer employees, are subject to contingent earnings thresholds.

Claiming an employer exemption. The employer bears the burden of establishing the applicability of any exemption from the FLSA’s pay requirements. Job titles, job descriptions, or the payment of a salary instead of an hourly rate are insufficient to confer exempt status on an employee. Moreover, Nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level or the special salary levels applicable to the U.S. territories.

The takeaway

Employers should start preparing now for the upcoming changes in the wage rule. Ensuring compliance on its non-exempt employees and exempt employees through an employer’s counsel review is a priority business item during the last two quarters of 2018. The employer’s counsel review should also include a look at the company’s time-keeping record documents as well as payroll reports for red flags in the event a future DOL wage and hour audit is on the horizon. You can pay the preventative legal costs now or be prepared to dole out significant monies later in the form of back pay or liquidated damages and attorney’s fees if the DOL comes knocking on your door to conduct an investigation.