On January 1, 2020, the U. S. Department of Labor’s (DOL's) long-awaited final rule updating the Fair Labor Standards Act’s (FLSA's) white collar exemptions will take effect. Most notable among the updates is the increasing of the minimum salary thresholds for overtime-exempt executive, administrative, and professional employees. The DOL estimates that these changes will affect at least 1.3 million workers who are currently classified as exempt.

This gives employers approximately 60 days to (1) understand the rule, (2) evaluate its impact on their organizations, and (3) implement any necessary changes.

What Is Changing?

The final rule raises the new minimum salary threshold (the "salary basis test") from $23,660 ($455 per week) to $35,568 per year ($684 per week). This is a significant increase, but it is a far cry from earlier, invalidated efforts from 2016. The final rule also allows for nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, provided that these payments are quarterly or more frequent. This means that up to $3,557 of the total salary amount can be accounted for via bonuses. The rule also raises the rarely used “highly compensated employee” salary level to $107,423.

What Is Staying the Same?

The final rule does not change the FLSA's duties tests, which determine whether an employee's current job responsibilities would allow the employee's being classified as overtime exempt. This means that classification as exempt is valid only if an employee (1) earns at least $684 per week on a salary basis, and (2) has the primary duties that would fulfill the applicable category (executive, administrative, or professional).

The final rule also omits any mechanism to automatically adjust salary levels for inflation, meaning that future increases must first go through a new rulemaking process.

A Call to Action for Employers

Employers must quickly assess their workforce and determine whether they currently have exempt employees making less than $684/week. If so, employers must then evaluate whether to (1) increase their salary to be in compliance with the new threshold, or (2) reclassify them as non-exempt, thus making them eligible for overtime compensation.

Here are basic steps employers should consider to ensure that they make the best possible decision for their organizations:

  • Prepare a list of all currently exempt workers making less than $684 per week, and work with their managers to estimate their weekly hours in the coming year.
  • Note whether potentially affected employees currently receive nondiscretionary incentive compensation, since this compensation can count for up to 10 percent of the new salary threshold.
  • Determine whether it makes better sense to raise the employees’ weekly salary to at least $684 and retain the exemption, or to convert the worker to non-exempt status.
  • Consider alternatives that could alleviate financial strain. For example, employers might want to (1) hire additional employees to reduce overtime, (2) reorganize workloads, or (3) adjust schedules and spread hours.

When making these difficult decisions, the following considerations should be kept in mind:

  • Remember to consider each employee’s likely hours when making this determination, as it might be less expensive to raise their salary than to keep the lower rate and pay significant overtime.
  • Don’t underestimate the psychological impact these decisions can have on affected employees, and have a well-developed communication strategy in place for explaining the changes. For example, employees who are reclassified as non-exempt might feel undervalued or demoted, even though this reclassification might result in those employees' earning more money in the coming year.
  • Raising salaries can have its own set of morale implications. For example, raising salaries for some employees and not others could cause discord in the workplace. And raising lower-level employees’ salaries could cause wage compression between those employees and their supervisors or more experienced colleagues.
  • If large-scale reclassification to non-exempt is contemplated, appropriate training on hours-tracking must be implemented, in combination with communication of employer policies regarding overtime.
  • When conducting this analysis, be alert for other potential wage and hour concerns. Making changes required by the new overtime rule offers a good opportunity to enact other, related changes to ensure better compliance. This is true even when the changes have nothing to do with the rule itself. Examples are worker misclassification issues, previously unknown pay disparities, or timekeeping improvements.