In September, the U.S. Department of Labor (DOL) published its final rule on the white-collar overtime exemptions to the Fair Labor Standards Act (FLSA). The regulations haven’t been updated since 2004, though the DOL proposed amendments in 2016 that were postponed and never implemented.
The final rule will take effect on January 1, 2020, making approximately 1.3 million more workers eligible for overtime protection.
Here’s what U.S. employers subject to the new rule need to know:
Overview of the FLSA Overtime Exemption for White-Collar Employees
The FLSA requires employers to pay certain employees overtime pay of at least 1.5 times their regular rate of pay if they work more than 40 hours in a workweek. There are a few exceptions to this rule, and one of the most prominent is the “white-collar” exemption: to qualify for overtime, employees cannot work in an executive, administrative, or professional capacity.
Employees must meet these three tests to fall within the white-collar exemption:
- Salary Basis Test: They must be paid a predetermined, fixed salary that is not subject to reduction because of variations in the quality or quantity of work that they perform.
- Salary Level Test: The salary they are paid must meet a minimum threshold amount.
- Duties Test: Their job responsibilities must primarily involve executive, administrative, or professional duties.
The Impact of the DOL’s New Overtime Rule
Employers who are subject to the FLSA need to be aware of three key changes:
- It raises the minimum salary requirement for employees who are exempt from overtime from $455 to $684 per week, or the equivalent of earning $35,568 per year.
- It raises the total annual compensation threshold for highly compensated employees from $100,000 to $107,432 per year.
- It allows employers to count additional compensation paid at least annually, such as non-discretionary bonuses and incentive payments, toward up to 10% of the minimum salary level.
The idea behind the Salary Level Test is that employees who are legitimately in executive, administrative, and professional roles are likely to be paid at least that amount.
Note that the minimum salary requirement will not apply to Puerto Rico employees, who will still adhere to the $455 level because of the Puerto Rico Oversight, Management, and Economic Stability Act. The remaining parts of the new rule will, however, apply.
Next Steps for Employer Compliance
Employers should pay close attention to this update and be aware that the DOL has pledged to revise these amounts more regularly in the future. They should also review their salary data for exempt workers whose salaries fall below the new threshold and consider whether any changes are necessary to employees’ salaries or classification. Employers may also need to adjust their budgets to account for the additional overtime expense as well as update their timekeeping and payment systems.
Check out the Poster Compliance Center website for more information about federal wage and hour labor law requirements under the FLSA.