Alert September 26, 2019

DOL Issues Final Rule Increasing Minimum Salary for Overtime Exemptions

Summary
  • Based on the Department of Labor’s Final Rule, the minimum annual salary level for most employees covered by the “white collar exemptions” from the Fair Labor Standards Act’s overtime pay requirement will increase from $23,660 to $35,568.
  • The duties tests, which must also be met to qualify for any exemption, will remain unchanged.
  • Most employees who are currently classified as exempt and receive an annual salary of less than $35,568 will either need to be provided a salary raise or be reclassified to nonexempt status, which will entail maintaining time records and paying overtime.
  • The new rule goes into effect on January 1, 2020.

On September 24, 2019, the Department of Labor (DOL) released the final version of a new rule (the Final Rule) concerning the minimum salary level for most employees covered by the “white collar exemptions” under the Fair Labor Standards Act (FLSA).

In the absence of an exemption, the FLSA provides that an employee is entitled to receive pay at the rate of time and one-half for all hours worked over 40 in a week. The most commonly used exemptions are the white collar exemptions, i.e., the exemptions for executive, administrative, professional, computer and outside sales employees. To come within one of the white collar exemptions, an employee must have job duties that qualify for one of those exemptions, known as the “duties tests.” To be exempt, most categories of employees under the white collar exemptions must also receive at least a minimum salary level, which is currently $455 per week ($23,660 per year). The Final Rule, which goes into effect on January 1, 2020, increases the minimum salary level for such employees.

By way of background, the last increase to the minimum salary level was in 2004. In 2016, the DOL promulgated a rule to raise the minimum annual salary level to $47,476 and automatically update it every three years (the 2016 Rule). However, a federal judge in Texas enjoined implementation and enforcement of the 2016 Rule in November 2016. The Final Rule effectively replaces the 2016 Rule.

NEW MINIMUM SALARY LEVELS

The Final Rule raises the minimum salary level for most categories of employees under the white collar exemptions from $455 per week ($23,660 per year) to $684 per week ($35,568 per year). Up to 10% of the new minimum salary level may be satisfied by the payment of nondiscretionary bonuses and incentive payments, including commissions, provided that those amounts are paid annually or on a more frequent basis. The Final Rule makes no change in any of the duties tests.

The Final Rule also raises the minimum total annual compensation level for “highly compensated employees” (HCEs) from $100,000 to $107,432. HCEs are employees who are exempt based on a combination of receiving greater compensation and customarily and regularly performing at least one of the exempt duties of the exemptions for executive, administrative or professional employees. Consistent with the current regulations concerning the HCE standard, the total annual compensation may include nondiscretionary bonuses and commissions. However, the salary portion must meet the new weekly salary minimum of $684 (without the 10% adjustment discussed above).

ADDITIONAL DOL COMMENTARY

The DOL’s Supplementary Information accompanying the regulatory changes explained that the DOL based the minimum salary level on the methodology that the DOL used to set the minimum salary level in 2004, while it based the new HCE minimum total annual compensation level on the 80th percentile of compensation for full-time salaried workers nationally.

Unlike the 2016 Rule, the Final Rule does not provide for automatic updating of the minimum salary level. Instead, in its Supplementary Information, the DOL expressed an intention, albeit a nonbinding one, to update the minimum salary level “more regularly in the future.”

SPECIAL CASES

The Final Rule also establishes certain special minimum salary levels, specifically: (1) $455 per week for workers in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands, (2) $380 per week for workers in American Samoa, and (3) $1,036 per week for workers in the motion picture producing industry.

LIMITS ON THE EFFECT OF THE NEW RULE

Employers should be cognizant that state laws may impose higher standards for salary thresholds. For example, California’s minimum salary level for exempt status exceeds the FLSA standard, with a current annual rate of $49,920 ($960 per week). New York has higher exempt salary thresholds that vary depending on employer size and location, including a current high of $58,500 annualized ($1,125 per week) for employers in New York City with 11 or more employees.

NEXT STEPS

Employers have approximately three months to comply with the Final Rule. Goodwin encourages employers that have exempt employees whose combination of salaries and other pay do not satisfy the new standards to consider some next steps. These are consistent with Goodwin’s observations in our May 19, 2016 alert concerning the 2016 Rule.

The Final Rule will require that some employees either receive salary increases to meet the new standards or be reclassified to nonexempt status. If employees are reclassified to nonexempt status, employers should consider whether to retain salaried status while paying overtime when required or to convert employees to hourly pay.

In those states where it is permissible to do so, employers may want to consider utilizing the “fluctuating workweek” method of payment to control overtime costs for salaried nonexempt employees. Use of this methodology can result in overtime costs of less than one-third the level that would apply to an hourly employee with the same base rate.

Regardless of whether employees who are reclassified as nonexempt remain salaried or are converted to hourly pay status, employers will need to consider what base rate to use, including whether to take expected overtime into account in setting the base rate.

To the extent that employers use bonuses or commissions to help satisfy the minimum salary threshold, they need to ensure that the bonus or commission plan meets the requirements under the Final Rule.

Employers will also need to ensure that they maintain proper time records for any reclassified employees (as well as all other nonexempt employees). In doing so, employers need to be careful to ensure that all time worked is counted, including off-hours work activities, such as responding to work-related emails.

Finally, employers may also consider steps to restrict overtime work to control overtime pay obligations.

For any questions on the DOL’s Final Rule, please contact an attorney in Goodwin’s Employment practice.