Back in March, we reported that the U.S. Department of Labor (USDOL) had released proposed regulations adjusting the salary level required for the executive, administrative, and professional employee (EAP), or so-called “white-collar” exemptions from the FLSA’s overtime pay requirements. The USDOL has now issued its Final Rule, which is set to take effect on January 1, 2020.
Under the Final Rule, for a worker to be exempt from the overtime pay requirements of the FLSA on the basis of the EAP exemption, they must be paid a minimum salary of $684 per week, or $35,568 per year. The current minimum salary threshold is $455 a week, or $23,660 per year. (The new minimum salary level is close to the $679 per week/$35,308 per year contained in the proposed rule earlier this year, and significantly less than the 2016 regulation [subsequently enjoined and rescinded] setting the exemption salary threshold at $913 per week/$47,476 per year.)
The Final Rule does not include automatic adjustments to the minimum salary level but provides that the thresholds will be updated more regularly in the future (approximately every four years), but only after notice and an opportunity for comment before any change would be implemented.
The Final Rule allows employers to include certain nondiscretionary bonuses (like a productivity bonus) and incentive payments (like commissions) towards up to 10% (no more than $3,556.80) of an employee’s salary for purposes of determining whether the required base salary level is met, so long as the employer pays those amounts at least annually.
The Final Rule also permits employers to make a final “catch-up” payment at the end of the year if the nondiscretionary bonuses and incentive payments are not enough to satisfy the base salary requirement of $35,568. The catch-up payment cannot exceed 10% of the base salary level (no more than $3,556.80) and must be paid within one pay period after the end of the 52-week period.
The Final Rule raises the salary threshold necessary to qualify for the “Highly Compensated Employee” (HCE) exemption from $100,000 to $107,432 per year. (The compensation level for the HCE exemption is set at the 80th percentile of full-time salaried workers nationwide, rather than the 90th percentile in the proposed rule.) To qualify as an HCE, the employee must receive at least the new minimum of $684 per week on a salary or fee basis, exclusive of bonuses and incentive payments. (Nondiscretionary bonuses and incentive payments cannot be used to satisfy the minimum salary for an HCE, but can be included in meeting the annual compensation requirement of $107,432.)
The Final Rule does not make any changes to the “duties” tests applicable to the EAP exemptions. (Recall that exempt status requires satisfaction of both the base salary level test and the exempt duties test.)
Employers will need to plan for the new rules that will take effect on January 1, 2020. Employers with workers who are currently exempt under the existing rule (i.e., performs exempt duties and is paid a salary of at least $455) but would not be exempt under the new rule (i.e., earns less than $684, per week), have a few options. The employer can increase the salary of employees who meet the duties test to at least $35,568 per year to retain exempt status; the employer can elect to reclassify the employee as non-exempt and limit hours to preclude overtime work; or the employer can reclassify the employee as non-exempt and pay the overtime premium of one-and-one half times the employees’ regular rate of pay for all overtime hours worked in a workweek.
The USDOL has prepared a Fact Sheet summarizing the updates to the rule: “Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees”.