On Tuesday, September 24, 2019, the United States Department of Labor (DOL) announced a final rule updating the thresholds for "exempt" status from overtime. Due to an increase in the salary threshold applicable to most "white collar" exempt employees, 1.3 million American workers are anticipated to become eligible for overtime pay under the Fair Labor Standards Act (FLSA). The final rule becomes effective January 1, 2020.
The major changes, discussed in more detail below, include:
The FLSA is the federal law which (1) guarantees a federal minimum wage, and (2) requires overtime for hours worked above forty hours per workweek at a rate of not less than one and one half times an employee's regular pay. Under the FLSA, an employee is entitled to overtime unless the employee is "exempt" from the overtime requirements under a FLSA exemption. The 2019 final rule will make more employees nonexempt from the overtime requirements, for the reasons discussed below.
First, most American exempt workers fall into the "white collar" or "executive, administrative, and professional" exemption, which requires employees to meet all three factors in a three-factor test. The employee must be (1) paid on a salary basis, (2) must meet a primary duties test for an executive, professional, or administrative worker, and (3) must be paid a minimum "salary threshold." After the new rule goes into effect, the "salary threshold" will change to $684 per week as the minimum salary level for determining whether an employee is exempt. The department reached this new number by applying the same methodology used in calculating the 2004 final rule to current data.
For context, the DOL attempted to raise the salary threshold in 2016 to an even higher amount through rulemaking. However, in November of 2016, the United States District Court for the Eastern District of Texas ordered the DOL not to enforce the new overtime final rule. The court specifically took issue with the raise in "salary threshold," and noted the 2016 final rule more than doubled the previous minimum salary level. This attempted change would have increased the salary threshold for EAP exemptions from $455 per week to $913 per week. At the time, it was estimated this change would result in 4.2 million workers becoming "non-exempt" under the FLSA, and therefore entitled to overtime for hours worked in excess of 40 hours per workweek. Consequently, the 2019 final rule attempts to harmonize the concerns of the court and the reality of increased employee earnings since 2004.
The result of this rule change will be some previously "white collar" or "EAP" exempt employees making more than $455 per week, but less than $684 per week, becoming non-exempt. However, this rule change may have less impact on educational institutions and their employees. Under the new rules, bona fide "teaching" employees with a primary duty of "teaching, tutoring, instructing or lecturing in the activity of imparting knowledge" employed by an educational establishment will remain exempt from overtime, regardless of amount of salary.
Second, to be considered a highly compensated exempt employee, an employee will need to be paid an annual compensation totaling $107,432. Annual compensation is one of the three factors considered when determining exemptions for highly compensated employees, and it is the only factor impacted by the 2019 change. An employee's primary duties must still include non-manual or office work and the employee must still "customarily and regularly" (i.e. greater than occasionally) perform at least one of the "exempt duties" of EAP employees.
Third, the 2019 final rules permit employers to calculate up to ten percent of an employee's standard salary threshold with nondiscretionary bonuses and incentive payments made at least annually. There was previously no regulatory provision to count nondiscretionary bonuses or incentive payments towards the salary threshold.
Moving into 2020, employers must be aware of and in compliance with the above changes impacting overtime exemptions under the FLSA. This Client Alert is intended to give an overview of the most significant changes to the law with the DOL's final rule, and is not exhaustive of all FLSA and overtime-related issues and classifications.
If you have further questions, please contact any member of the Ahlers & Cooney Employment Law Group.