This morning the Department of Labor (DOL) released its highly anticipated final rule updating the minimum salary thresholds for employees to qualify for the Fair Labor Standard Act’s (FLSA’s) executive, administrative and professional employee exemptions. Scheduled to take effect Jan. 1, 2020, the final rule raises the “standard salary level” for the FLSA’s white collar exemptions from the currently enforced level of $455 per week to $684 per week, or $35,568 per year.
The final rule, which formally rescinds the Obama administration’s 2016 proposed final rule, also raises the total annual compensation level for “highly compensated employees (HCE)” from the currently enforced level of $100,000 to $107,432 per year and revises the special salary levels for workers in U.S. territories and in the motion picture industry. Under the final rule, employers may count nondiscretionary bonuses, incentives and commissions toward up to 10 percent of the standard salary level, so long as those employers pay those amounts at least annually.
Although the final rule will significantly change the minimum salary requirement for these exemptions, it explicitly notes that it does not alter the DOL’s long-standing position that employers may pay their exempt employees additional compensation of any form beyond the minimum amount needed to satisfy the salary basis and salary-level tests.
Unlike the 2016 proposed final rule, the final rule released today does not provide for automatic updates and increases to the minimum salary basis. Instead, the final rule reaffirms the DOL’s commitment to evaluating the minimum salary thresholds “more frequently,” on an anticipated four-year basis.
The DOL Decreases the Minimum Salary Threshold for the Highly Compensated Employee Exemption After Consideration of Public Comments.
In 2016 the DOL under the Obama administration published a new overtime rule that would have doubled the minimum salary threshold for exempt employees to $913/week. The new rule was set to become effective Dec. 1, 2016, but on Nov. 22, 2016, just days before the rule’s implementation, Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas issued a nationwide injunction blocking the implementation of the rule. Judge Mazzant later granted the state-petitioners summary judgment, invalidating the revised regulations in their entirety.
On March 22, 2019, the DOL published and opened for public comment its Notice of Proposed Rulemaking, proposing to rescind the 2016 Obama administration final rule and update the minimum salary level to $679/week ($35,308 annually) for the FLSA’s “white collar” exemptions and $147,414 for the highly compensated employee exemption.
According to the DOL, it received more than 116,000 comments on the Notice of Proposed Rulemaking during the 60-day comment period that ended on May 21, 2019. Taking into account the public comments, the DOL decided to adopt its original proposal concerning the use of 10 percent of nondiscretionary bonuses to satisfy the salary basis and only slightly increased its minimum salary basis from $679 to $684 per week after updating its earning data with information obtained after March 2019.
The only significant difference between the final rule and the original Notice of Proposed Rulemaking is the minimum salary basis to qualify for the highly compensated employee exemption. Originally, the DOL had proposed increasing the minimum annual salary basis for the HCE exemption to a level equal with the 90th percentile of all full-time salaried workers ($147,414). However, after reviewing the public comments, the DOL has decided to lower the percentile at which to set the HCE salary threshold to the 80th percentile of all full-time salaried workers ($107,432), of which $684 must be paid weekly on a salary or fee basis. While the final rule does permit nondiscretionary bonuses and incentive payments (including commissions) to be counted toward the HCE total annual compensation requirement, the final rule requires that to qualify for the exemption, employees must receive at least the standard $684/week salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments.
Employers Should Begin Preparing Now for the Implementation of the Final Rule.
The DOL has announced that the new overtime rule will take effect Jan. 1, 2020, and is expected to result in approximately 1.2 million employees no longer qualifying as exempt from the FLSA’s overtime regulations.
Employers should begin preparing now to ensure that their payroll procedures comply with the new rule by first reviewing payroll and salary records to determine which employees would no longer be exempt under the higher salary requirements. For those employees, companies will need to decide whether or not to keep the compensation rates the same but begin paying these employees overtime for all hours worked over 40 in any given workweek or to increase their annual salary to meet the new minimum salary thresholds.