The US Department of Labor (DOL) announced the long-awaited final overtime rule on Tuesday. The Fair Labor Standards Act (FLSA) requires employers to pay time-and-a-half rates to workers making less than a threshold amount for all hours beyond 40 per week. The new rule lifts the annual salary threshold below which workers qualify for overtime wages from $23,600 annually to $35,568 annually. The new rule did not change the duties tests for the “white collar” exemptions, but increases the salary level needed to qualify as exempt under the FLSA’s white collar and highly compensated exemptions. The rule goes into effect January 1, 2020, and DOL estimates it will extend overtime pay eligibility to an estimated 1.3 million workers.

The FLSA’s white collar exemptions exclude certain executive, administrative, and professional employees from federal minimum wage and overtime requirements. Currently, to qualify for one of these exemptions, an employee generally must

  • be salaried, meaning that he or she is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test);
  • be paid more than a specified salary threshold, currently $455 per week or $23,660 annually (the salary level test); and
  • primarily perform executive, administrative, or professional duties as provided in the DOL’s regulations (the duties test).

Additionally, under the “highly compensated test,” certain employees are exempt from the FLSA’s overtime pay requirements if they are paid total annual compensation of at least $100,000, receive at least $455 per week paid on a salary or fee basis, perform office or nonmanual work, and customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.

In 2016, the DOL issued a final rule that would have, among other things, increased the annual salary level to $47,476. Before the rule went into effect, however, a Texas district court judge declared the rule invalid and the DOL has never enforced the changes. The DOL’s new rule rescinds and replaces the 2016 rule.

Key Provisions of the Final Rule

In the final rule, the DOL

  • raises the “standard salary level” from the currently enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker);
  • raises the total annual compensation requirement for “highly compensated employees” from the currently enforced level of $100,000 per year to $107,432 per year;
  • allows employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices; and
  • opted not to include automatic updates – DOL will review the salary level every four years for notice and comment rulemaking.

The final rule slightly increases the salary level from the proposed level of $679 per week ($35,308 annually) but in a surprise move, DOL reduced the highly compensated employee salary level from the proposed $147,600 to $107,432.

Effective Date

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

Recommended Next Steps

Although worker advocates are expected to challenge the rule to attempt to resurrect the 2016 rule, the success of such challenges is uncertain and employers should be proactively planning to get ahead of the January 1, 2020, effective date. Education and health services, wholesale and retail trade, and professional and business services are the most impacted industries, according to DOL, but all industries are potentially impacted. Also often overlooked is the impact on nonprofits and state and local governments, which are subject to the FLSA and often have lower salaries.

We recommend that companies immediately audit their current employee population to determine the impact on staffing and compensation models, and review the classification of “close to the line” positions. All companies should be taking a close look at their employees to make sure workers are properly classified, but what to do after that will depend entirely on their individual business needs. Some may choose to hire additional employees to reduce overtime, others may opt to pay overtime if their workers in this salary bracket spend more than 40 hours a week on the job, while some may decide to raise salary levels above $35,368, or review and tighten policies to ensure employees do not work more than 40 hours per week.

Reclassifying exempt employees to nonexempt, in turn, requires considering a broad range of issues, including a communication strategy, manager and employee training, new or revised timekeeping policies and practices, scheduling, compensation structures, calculation of the overtime rate, and many other issues. Robust time reporting policies and training are critical for reclassified workers, who are not accustomed to reporting hours. Employers must carefully consider and communicate any limits on overtime hours if reclassified positions previously required considerable overtime and the expectations for those jobs will not change. Plaintiffs’ lawyers seize on that scenario to argue that the reclassified employees necessarily must be working off-the-clock.

If job positions do need to be reclassified from exempt to nonexempt, that might have a knock-on effect for employees who earn above the new salary level. The publicity generated by the new rule may also cause a number of employees to question whether they are properly classified. Planning ahead is critical to managing the risks associated with reclassification.

Regardless of what business decisions they decide to make, employers must remain mindful of states with overtime laws that already require higher salary levels to qualify for certain exemptions. Some states increase these exemptions every year, and employers must simultaneously comply with these state exemptions and with whatever federal minimum is implemented. For example, in order to qualify for California’s white collar exemptions in 2020, an employee of a larger employer must receive an annual salary of at least $54,080 and employees of small employers must receive an annual salary of $49,920.

Upcoming Webinar

Join us on October 4 for a webinar discussing the key takeaways from DOL’s updated overtime rule. Register here.