Employment Alert: "The DOL’s Final Rule on Increasing the Salary Threshold for FLSA Exemptions"

This is an update to our March 2019 Employment Alert “The Salary Test Revisited: DOL Proposes Increased Salary Threshold for Overtime Exemptions.”  Back in March, we discussed the U.S. Department of Labor’s (the “DOL”) proposed rule amending the overtime exemptions under the Fair Labor Standards Act (the “FLSA”).  On September 24, 2019, the DOL announced its final rule, effective January 1, 2020, which will impact more than 1 million United States employees.

What’s changing?

• For the administrative, executive, and professional exemptions, the minimum salary required to qualify for the exemption will increase to $684/week ($35,568/year).  The current salary threshold is $455/week ($23,660/year).  The increase to $684/week is significantly less than the $913/week ($47,476/year) that was proposed—and ultimately invalidated—in 2016.
    
• For the administrative, executive, and professional exemptions, employers will be able to count certain nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually toward as much as 10% of the minimum salary threshold.
    
• For the highly compensated employee exemption, the salary threshold will increase to $107,432/year.  The current salary threshold for the highly compensated employee exemption is $100,000/year. 
    
• Approximately 1.3 million employees will be newly eligible for overtime pay as a result of the new regulations.  As of January 1, 2020, employers will have to pay time-and-a-half to employees making less than the above salary thresholds for any hours worked over 40 hours per workweek. 

What’s staying the same?

• The job duties tests that delineate the work employees must perform to qualify for the administrative, executive, professional, and highly compensated employee exemptions are not changing.
• For these exemptions, the employee must meet both the “job duties test” and the “salary test” to qualify for the exemption.

What does this mean for employers?

Prior to January 1, 2020, employers need to make salary and classification decisions for those job positions that are currently classified as exempt but will no longer meet the salary criteria when the new regulations come into effect.  This includes administrative, executive, or professional exempt employees that currently make less than $35,568 annually, and highly compensated exempt employees that currently make less than $107,432 annually.

Employers will need to decide whether to increase the salaries for these employees to comply with the new thresholds, or to reclassify the employees as non-exempt and pay overtime for hours worked in excess of 40 hours per week.  Employers that decide to reclassify employees as non-exempt typically attempt to create a new hourly rate that takes into account the potential overtime pay (based on typical work schedules) to provide similar overall compensation to the employees.  While employers do have to pay employees for all time worked, they can adjust work schedules or require employees to get permission prior to working overtime hours to minimize overtime pay.

The final rule should prompt employers to audit not only the salaries—but also the job duties—of all exempt employees, and to make any necessary adjustments before January 1, 2020 to ensure that employees are properly classified.  Employers should also review their payroll policies and procedures to make sure that overtime is being properly paid to all non-exempt employees.  For example, there are various regulations that govern what types of compensation need to be included in calculating an employee’s regular rate for purposes of determining the amount of overtime pay.