The Department of Labor estimates that the new minimum salary will expand eligibility for overtime pay to an additional 1.3 million workers.

On September 24, 2019, the U.S. Department of Labor (DOL) announced a highly anticipated final rule that modifies the salary level requirements of the Fair Labor Standards Act’s (FLSA) so-called white-collar exemptions (i.e. professional, administrative, executive and computer professional exemptions). The DOL had announced its proposed modifications in a notice of proposed rulemaking issued in March 2019, which was followed by a period of public comment. The final rule will increase the minimum guaranteed weekly salary for those exemptions to $684 per week, or $35,568 per year. The final rule also modestly increases the minimum compensation threshold for the highly compensated employee exemption and eschews a proposed schedule for regular increases in the minimum salary moving forward. The DOL estimates that the new minimum salary will expand eligibility for overtime pay to an additional 1.3 million workers.

The final rule will go into effect January 1, 2020.

During the Obama administration, the DOL previously had issued a final rule in 2016 to, among other things, increase the minimum salary level to $913 per week, or $47,476 per year. However, a Texas federal court issued a permanent injunction that blocked implementation of the 2016 final rule, and it never went into effect.

Key Provisions of the New Overtime Rule

By way of background, in order to classify an employee as exempt from the FLSA’s overtime and minimum wage requirements pursuant to one of the white-collar exemptions, the following three tests must be met: (1) minimum salary test; (2) salary basis test; and (3) duties test. The final rule announced on September 24, 2019, changes the minimum salary test.

Minimum Guaranteed Salary

The minimum salary will increase from $455 a week to $684 a week ($35,568 per year). The final rule will permit employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test, provided such bonuses are paid at least annually.

Highly Compensated Employee Exemption

The threshold salary for the “highly compensated employee” exemption―which enables employers to meet a simpler “duties” test as long as a higher minimum guaranteed compensation threshold is met―will increase from $100,000 to $107,432 for a full-year worker, which is the annualized value of the 80th percentile of weekly earnings of full-time salaried workers nationally. This increase in the minimum threshold for the highly compensated employee exemption is significantly lower than the threshold of $147,414 in the DOL’s proposed rule issued earlier in 2019.

No Scheduled Updates to the Minimum Salary Thresholds

Federal law mandates that the DOL define and delimit the overtime and minimum wage exemptions “from time to time.” 29 U.S.C. 213(a)(1). The proposed rule published in March 2019 stated the DOL’s intention to update the salary minimums every four years through the normal rulemaking process, including a public comment period. (The 2016 rule had gone even further, including automatic updates that would have gone into effect without additional rulemaking.) However, the final rule abandoned these updates, with the DOL noting that this approach would “deprive the department of flexibility to adapt to unanticipated circumstances.”

Special Salary Levels

The final rule will apply a special weekly salary level of $455 to Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands. It will apply a separate weekly special salary level of $380 to American Samoa. The final rule also will update the special weekly “base rate” for the motion picture producing industry to $1,043.

Future Updates to the Earnings Thresholds

The last time that the DOL successfully increased the salary thresholds was 2004. Federal law mandates that the DOL define and delimit the overtime and minimum wage exemptions “from time to time.” 29 U.S.C. 213(a)(1). The final rule states the DOL’s intention to update “more regularly” the salary minimums through the notice-and-comment rulemaking process. Notably, the final rule did not adopt a plan, reflected in the proposed rule issued earlier this year, to increase the salary threshold every four years going forward, with each such increase being preceded by a period of public comments.

What This Means for Employers

Wage-and-hour compliance remains an important concern for employers. Noncompliance with the FLSA and its regulations can result in significant liability, along with potentially negative effects on reputation, morale and recruitment efforts.

The key question that employers will need to decide with exempt employees currently earning below the new minimum salary is whether to raise their salaries to retain their exempt status or to convert them to nonexempt status.

It is important to note that employees get the benefit of federal or state law, whichever is more favorable. That is particularly significant for employees in jurisdictions, such as California and New York, that have higher minimum salary thresholds for white-collar exemptions.

Employers should anticipate that the final rule will go in effect on January 1, 2020, and plan accordingly.