On September 24, 2019 the Trump Administration’s Department of Labor officially raised the annual minimum salary threshold for the white-collar exemptions, i.e., administrative, executive, and professional exemptions, to $35,568 ($684 per week) from $23,660 ($455 per week). An increase to the minimum salary threshold was long overdue as the last raise was in 2004.
This change is set to take effect January 1, 2020. The immediate impact of this amendment means more than 1 million American workers will become newly eligible for overtime pay.
While this should be welcome news to many employees who will now be able to receive overtime, many others view the new rule as not going far enough because it falls well short of the Obama Administration’s 2016 attempt to increase the salary threshold to more than $47,000 annually. Obama’s proposal was blocked by a federal court in Texas in the waning days of his presidency and not appealed by the Trump administration. Other aspects of the Obama proposal that are not part of the Trump proposal include automatic adjustments to the salary threshold every three years tied to the cost of living and different minimum salary thresholds based on the region of the country an employee lives in.
Another interesting aspect of the new rule is that non-discretionary bonuses, e.g., attendance bonus, production bonus, safety bonus, etc., and incentive payments such as commissions paid on annual or a more frequent basis can be used to satisfy up to 10% of the minimum salary threshold. Additionally, the new rule raises the threshold for highly compensated employees from $100,000 to $107,432. Highly compensated employees can achieve exempt status if they meet a reduced duties test of office or non-manual work and customarily and regularly perform at least one of the duties of a white-collar employee.
So what does the increase in the minimum salary threshold mean to employers? Many employers will be faced with a choice — increase employees’ salaries beyond the new salary threshold to potentially avoid overtime pay or pay more in overtime. As employers consider this question, they will still have to navigate the duties test for each of the white-collar exemptions, which have not been modified by the new amendments. The duties test for each of the white-collar exemptions are:
- Executive Exemption: Primary duty is managing the enterprise or a department or subdivision of an enterprise AND regularly directing the work of at least two full-time employees, with the authority to hire and fire.
- Administrative Exemption: Primary duty must be office or non-manual work that is directly related to the management or general business operations of the employer coupled with the exercise of discretion and independent judgment with respect to matters of significance.
- Professional Exemption: Primary duty must be work requiring advanced knowledge in a field of science or learning that is customarily acquired through prolonged, specialized, intellectual instruction, and/or study.
As you might expect, the Department of Labor’s duties test for each white-collar exemption is highly fact specific and narrowly construed against employers.
Employers should begin planning now to comply with the new rules. Review the pay data for exempt workers that are below the $35,568 annual salary threshold and audit how often they work more than 40 hours in a workweek. In doing so, employers can make an informed choice between increasing salaries above the minimum threshold or reclassifying employees as non-exempt and managing the newly reclassified employees’ overtime. In addition, now is a good time to review each employee’s duties to make sure they meet the “duties” test for one of the white-collar exemptions. Finally, employees who will now have to track their time will need some level of training in recording accurately all hours worked. For employers there is a lot to do in the next three months as January 2020 is right around the corner.