More than 1.3 million American workers who make less than $35,568 annually will be eligible for overtime pay under a final rule issued today, September 24, 2019, by the U.S. Department of Labor (DOL) which enforces the Fair Labor Standards Act (FLSA). The new rate will take effect Jan. 1, 2020.
To be exempt from overtime under the federal Fair Labor Standards Act (FLSA), employees must be paid a salary of at least the threshold amount and meet certain duties tests. If they are paid less or do not meet the tests, they must be paid 1 1/2 times their regular hourly rate for hours worked in excess of 40 hours in a workweek.
This rule is likely to have the largest impact on retail stores and restaurants who have relied on the administrative exemption to exempt managers making at least $23,660.00 annually from overtime.
The final rule updates the earnings thresholds necessary to exempt executive, administrative, or professional employees from the FLSA’s minimum wage and overtime pay requirements, and allows employers to count a portion of certain bonuses (and commissions) towards meeting the salary level. The new thresholds account for growth in employee earnings since the currently enforced thresholds were set in 2004. In the final rule, the Department is:
- raising the “standard salary level” from the current level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker);
- raising the total annual compensation level for “highly compensated employees (HCE)” from $100,000 to $107,432 per year, increasing overtime eligibility for an additional 101,800 workers;
- allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level; and
- updating the special salary levels for workers in U.S. territories and in the motion picture industry.
The Trump administration and other employer organizations such as the Society for Human Resources Management believe this action is a reasonable compromise to an Obama administration regulation, which was blocked by a federal judge in Texas in 2016. That rule would have doubled the salary threshold to $47,500 and automatically updated it every three years.
The move is expected to draw a legal challenge from worker advocates who have urged the Department to pursue a salary threshold more consistent with the Obama administration regulation, but will ultimately likely survive and be enacted in January 2020.
What Employers Should Do Now
Employers should immediately identify exempt workers earning below the threshold. In consultation with human resources and outside employment counsel, employers also should weigh the cost of raising employee salaries to at least $35,568 against the cost of reclassifying employees as nonexempt and paying overtime.
A minimum salary threshold is just one requirement for classifying workers as exempt. Employers should also take the time to review job descriptions against the employees’ actual duties to ensure they meet one of the exemption criteria:
- Executive exemption. The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers.
- Administrative exemption. The employee’s primary duty must be nonmanual or work that is directly related to the management or operations of the employer or the employer’s clientele. The employee’s primary duty also must include the exercise of discretion and independent judgment with respect to matters of significance.
- Professional exemption. The employee’s primary duty must be work requiring advanced knowledge in a field of science or learning that is customarily acquired by special study and advanced degrees.
Before implementing any reclassification, employers should develop a strategy to communicate with employees about this change. Many employees take pride in their exempt status and may perceive a reclassification to an hourly status as a demotion. Employers will want to reference government regulations that are prompting the change. Employees who have not previously kept time will need to be trained in time-keeping procedures used by the employer.
Employers may also want to review their employment handbooks and update overtime policies and disciplinary action that can result from unapproved overtime. The employment lawyers at Leech Tishman are prepared to help employers navigate these new rules and update policies as appropriate.