U.S. Department of Labor Issues Long Awaited Final Overtime Rule Updating White Collar Exemptions
After months of anticipation, on September 24th the DOL announced its final rule modifying the requirements for employees to satisfy the white collar exemptions under the Fair Labor Standards Act (”FLSA”). The final rule is scheduled to take effect on January 1, 2020.
Under the FLSA, employees are entitled to wages at or above the federal minimum wage (i.e., $7.25/hr.) and must be paid time and one-half for work over forty (40) in any work week. However, certain employees are exempted from this requirement if they are classified as executive, administrative, or professional employees and are paid on a salary basis. All other employees, subject to limited exceptions, are considered non-exempt and must be paid at least minimum wage and overtime for hours worked over forty (40) in a week. Generally, employers have the burden to demonstrate that an employee is exempt from overtime by satisfying both the salary basis test (i.e., predetermined salary not subject to adjustment based on hours worked) and the specific duties tests, as defined by DOL regulations. In addition, an employer is required to compensate exempt employees at or above a minimum salary level. Currently, this amount is $455 per week or $23,660 annually. The DOL’s September 24th announcement addresses only the minimum salary threshold to qualify for these exemptions.
The DOL’s final rule sets the new salary threshold at $684 per week (equivalent to $35,568 per year for a full-year worker), which is considerably lower than the 2016 final rule that ultimately never took effect. In addition, the final rule sets the total annual compensation requirement for highly compensated employees at $107,432 annually (presently, $100,000 per year) and at least a weekly salary of $684. Although a topic of discussion, the new rule leaves the current duties tests unchanged.
Employers will be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level which is “in recognition of evolving pay practices.” These payments include nondiscretionary incentive bonuses tied to productivity and profitability. The final rule requires employers to make such payments on an annual or more frequent basis and allows for a “catch-up” payment in order to credit nondiscretionary bonuses and incentive payments toward a portion of the required salary level within one pay period of the end of the 52-week period. Any “catch-up” payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid. However, the final rule retains the requirement that highly compensated employees must receive at least the full standard salary each pay period without regard to the payment of nondiscretionary bonuses and incentive payments and continues to permit nondiscretionary bonuses and incentive payments (including commissions) to count toward the total annual compensation requirement.
The DOL estimates that the new rules will extend the right to overtime compensation to an estimated 1.3 million workers who are currently classified as exempt.
The final rule is available at http://www.dol.gov/whd/overtime 2019.
Although the new rule does not take effect until January 1, 2020, employers are advised to take immediate steps to prepare for those changes now, including:
- Consider potential costs to absorb and manage overtime.
- Review the salary ranges of positions within your organization that are currently considered exempt under the executive, administrative and professional exemptions.
- Identify positions earning less than the $35,568 threshold and determine for which positions an increase in salary is necessary.
- Reclassify employees to non-exempt and consider alternative compensation incentives to counter loss of exempt status.
- Evaluate positions to determine particular tasks the employee performs on a weekly basis and the number of hours required in order to assess potential overtime impact.
- Determine if certain job duties can be redistributed or eliminated or if a function can be outsourced.
- Consider whether nondiscretionary bonuses or incentive payments (including commissions) will be sufficient to satisfy the new salary threshold for exemption. Keep in mind that the new rule allows employers to credit these payments in an amount up to 10% of the salary threshold.
- Review possible alternative compensation plans rather than simply moving to hourly status (e.g., fixed salary for fluctuating hours).
- Consider restricting hours and schedule adjustments to limit potential overtime.
- Implement policies restricting after-hours use of electronic communication devices.
- Evaluate hours tracking methods and reporting and develop a plan to begin tracking hours worked. Employers are required to keep accurate records of hours worked on a weekly basis for non-exempt workers. It may be helpful to begin tracking those hours now in order to plan for the conversion to overtime status.
While the new rules are not as impactful as those originally proposed, they may change the way employers handle certain aspects of their businesses. Stay tuned for additional guidance as new developments unfold.
The attorneys in the Labor and Employment Group of Bose McKinney & Evans are available to answer your questions and provide guidance regarding the impacts of these changes.