In the three-year saga over anticipated changes to the minimum salary threshold for overtime exemptions under the Fair Labour Standards Act (FLSA), the latest – and probably final – development occurred on 24 September 2019, when the US Department of Labour (DOL) issued its new final rule updating the regulations in this regard. The new regulations, which become effective on 1 January 2020, increase the minimum salary threshold for exempt employees under the FLSA from $455 per week to $684 per week ($35,568 per year).

FLSA overview

The FLSA was enacted in 1938 and requires that certain covered employees receive overtime pay for all hours over 40 hours worked per week. Section 213(a)(1) of the FLSA provides exemptions from this overtime requirement for "any employee employed in a bona fide executive, administrative, or professional capacity" (otherwise known as the 'white collar' exemption). Although the FLSA does not define the terms 'bona fide executive', 'administrative' or 'professional capacity', over the years, the DOL has issued regulations defining these terms to include:

  • a salary basis and threshold test (ie, the employee must be paid a salary at a certain amount); and
  • a duties test (ie, the employee must perform certain duties in order to be considered exempt).

Current minimum salary

The current minimum salary was last updated in 2004 and set the standard salary basis for exempt employees at $455 per week ($23,660 per year). In 2016, during the final year of the Obama administration, the DOL proposed a new regulation that more than doubled the minimum salary threshold, increasing it to a proposed $913 per week ($47,476 per year), but left the duties test untouched for exempt employees. On 22 November 2016 a federal judge entered a nationwide injunction, blocking the rule from taking effect. The Trump administration elected not to defend the 2016 rule.

New minimum salary

With the 24 September 2019 announcement, the DOL has again increased the minimum salary level, accounting for wage growth since 2004. To determine the new increase, the DOL relied on the same metrics as those used when it set the standard salary level in 2004: it looked at the 20th percentile of earnings of full-time salaried workers in the US south (which is the lowest wage consensus region) or in the retail sector nationwide. The DOL's new rule does not change the job duties that establish whether a worker is exempt; rather, it changes only the salary threshold – although this is not as high as the proposed 2016 regulation. Additionally, employers may use non-discretionary bonuses, incentives and commissions paid at least annually to satisfy up to 10% of the salary level. The new rule also increases the minimum annual compensation level for "highly compensated employees" to $107,432 per year, up from $100,000.

Takeaways for employers

Employers must evaluate their workforces to identify positions that will need to be reclassified or will require modifications in wages or timekeeping practices. Any worker who is currently classified as exempt but makes less than $684 per week must receive a salary increase to meet the minimum $35,568 annual salary or will have to be converted to an hourly employee, eligible for overtime pay. Employers must implement these changes on or before 1 January 2020 in order to comply with the regulation. With only a few months left in 2019, and the two-year hiatus that this issue has enjoyed, employers should revisit the plans that they prepared in anticipation of the original proposed regulation in 2016.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.