Overtime Update to Have Wide Reaching Effect on Employers

Today, September, 24, 2019, the U.S. Department of Labor announced a final rule to increase the salary threshold necessary to remain an exempt employee. The change is estimated to affect 1.3 million American workers under the Fair Labor Standards Act (FLSA). Below is a synopsis of the facts embodying that rule.

The final rule updates the earnings thresholds necessary to exempt executive, administrative and professional employees from the Fair Labor Standards Act’s (FLSA) minimum wage and overtime pay requirements, and allows employers to count a portion of certain bonuses/commissions towards meeting the salary level. The new thresholds account for growth in employee earnings since the thresholds were last updated in 2004.

What you need to know

The final rule:

• raises the “standard salary level” from the currently enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker);
• raises the total annual compensation level for “highly compensated employees” (HCE) from the currently-enforced level of $100,000 to $107,432 per year;
• does not change the duties test for any exemptions;
• allows employers to use non-discretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to ten percent of the standard salary level in recognition of evolving pay practices; and
• revises the special salary levels for workers in U.S. territories and in the motion picture industry.

Additionally, the Department intends to update the standard salary and HCEs total annual compensation levels more regularly in the future through notice-and-comment rulemaking.

Prior to this final rule, the FLSA set a threshold of $24,000 per year for an individual to meet the salary basis test to qualify as an exempt employee under the FLSA (in addition to meeting the duties test for exemption). In 2016, the Obama administration attempted to increase the salary threshold to $47,476.00. The proposal prior to this ruling called for a federal yearly required salary (under the FLSA) of $35,300; however, the final federal ruling raises the yearly standard salary level to $35,568. In many states, the local or state wage and hour law already required a salary threshold of higher than $24,000 per year in order to classify an individual as exempt.

What you need to do

Audit your exempt employees. Are any of them making less than $35,568 per year or less than $684 per week? If they are, you have until January 1, 2020, when the change takes effect to change the employee’s compensation structure. This may include:

• moving the employee from exempt to non-exempt status;
• increasing the rate of pay to above $35,568 per year; or
• keeping compensation at the same rate by adding in non-discretionary bonuses or incentive pay (this can only be used if the normal salary is more than $32,012 per year).

If you have questions or concerns about how this change will affect your business, please reach out to Tawny Alvarez or another member of Verrill’s Employment & Labor Group.