The United States Department of Labor (DOL) issued its Final Overtime Rule (Final Rule) to raise the salary threshold level necessary to exempt certain employees from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay requirements. Set to go into effect on January 1, 2020, the Final Rule also allows employers to count a portion of certain bonuses (and commissions) towards meeting this new salary threshold level.
Employers should note that paying an employee more than the DOL-mandated salary threshold does not automatically exempt them from FLSA requirements and other salary laws that vary by state. Meeting the relevant job duties test is also as important as salary levels in determining overtime exemptions.
New Salary Thresholds
Issued on September 24, the Final Rule specifically increases the salary threshold for executive, administrative and professional employees from $455 per week ($23,660 per year) to $684 per week ($35,568 per year). The DOL also increased the total annual compensation level to be exempt from overtime and minimum wage requirements under the FLSA’s “highly compensated employee” from $100,000 to $107,432 per year. The Final Rule also revised the special salary level of $455 per week for employees in Puerto Rico, the U.S. Virgin Islands, Guam and the Commonwealth of the Northern Mariana Islands, but the special salary level remains unchanged at $380 per week for American Samoa. The DOL also is maintaining a special “base rate” threshold for employees in the motion picture producing industry, which is $1,043 per week (or a proportionate amount based on the number of days worked).
The Final Rule also allows an employer to count nondiscretionary bonuses and incentive payments towards a portion of the salary threshold level. Employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary threshold level provided that such monies are paid at least annually. If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given 52-week period to retain his or her exempt status, the DOL also permits a “catch-up” payment at the end of the 52-week period. The employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 52-week period). Any such catch-up payment will count only toward the prior 52-week period’s salary amount and not toward the salary amount in the 52-week period in which it was paid. If the employer chooses not to make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the previous 52-week period.
Thresholds Vary by State
It is also important to remember that many states have their own salary thresholds for exempt status and these thresholds are not impacted by the DOL’s Final Rule. For example, New York’s salary threshold for businesses in New York City with 11 or more employees is $1,125 per week ($58,500 per year). This means that in New York City, in order to classify employees as exempt under the executive/managerial or administrative exemption, the employer must pay the employee a salary of at least $1,125 per week. Similarly, in California the salary threshold exceeds the federal minimum at $880 per week for employers with 25 or fewer employees ($45,760 per year) or $960 per week for employers with more than 25 employees ($49,920 per year). Further, some states, including New York and California, do not permit employers to use non-salary remuneration, such as commissions or nondiscretionary bonuses, to satisfy the salary threshold. Therefore, it is imperative that employers work with counsel to ensure that they are paying the correct salary to exempt employees under applicable state law.
Finally, please note that white-collar employees earning below the $684 threshold (other than teachers, lawyers and doctors) are entitled to overtime, but simply paying an employee above the threshold is not sufficient to exempt them from the requirements under the FLSA or New York labor laws. For an employee to be properly classified as exempt, the employee must satisfy both the salary test and a duties test. The duties test requirement for exempt status under both federal and state law remains unchanged. When reviewing their employees’ salaries, an employer should also review their job duties to ensure they satisfy the appropriate duties test that would allow such employees to remain exempt from overtime and minimum wage requirements.