On September 24, 2019, the U.S. Department of Labor’s Wage & Hour Division issued its final rule updating the threshold earnings necessary for application of the Executive, Administrative, and Professional exemptions to the overtime rules established by the federal Fair Labor Standards Act (“FLSA”). The last salary threshold increase was in 2004. The new rule takes effect January 1, 2020.
The FLSA requires payment of a minimum hourly wage and overtime to employees who are not otherwise “exempt.” Currently, to qualify for one of these three so-called “white collar” exemptions, an employee must:
- be paid a salary (a predetermined and fixed amount not subject to reduction based on variation in quality or quantity of work performed)—the “salary basis test;”
- be paid a minimum salary amount—the “salary level test;” and
- primarily perform certain executive, administrative, or professional duties described by the DOL—the “duties test”
The new rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level.
The new rule also revises the salary level test. Specifically:
- the standard salary level required for exempt workers will increase from $455 per week to $684 per week (equivalent to annual salaries of $23,660 and $35,568, respectively);
- the total annual compensation level for exempt “highly compensated employees” (whose higher compensation levels are paired with a reduced duties requirement to provide an alternative basis for exemption) will increase from $100,000 per year to $107,432 per year; and
- special salary levels for workers in U.S. territories and in the motion picture industry will be revised.
The new rule does not alter the duties test.
The Department of Labor estimates this rule will make an additional 1.3 million Americans eligible for overtime pay. All employers are therefore advised to review their workforce compensation levels to determine whether any employees currently considered exempt no longer qualify for an exemption. If so, employers will need to consider either paying those employees overtime or adjusting their compensation to meet the new minimum threshold.
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