On September 24, 2019, the U.S. Department of Labor (DOL) announced a final rule that, effective January 1, 2020, will increase the salary threshold, by approximately 50%, that so-called “white collar” employees must be paid in order to be classified as “exempt” under the Fair Labor Standards Act (FLSA). Employees who do not meet the new heightened salary threshold of $684 per week (which equates to $35,568 per year) will be considered non-exempt and thus eligible for overtime pay. The DOL estimates that this change will impact approximately 1.3 million workers. Employers should act now to ensure that they will be in compliance with the new rule by January 1, 2020.
To be classified as an exempt employee (and thus not eligible for overtime) under the FLSA’s “white collar” executive, administrative, or professional exemptions, an employee must meet three requirements: (1) satisfy a “duties test” (i.e., have and perform specific white collar job duties); (2) be paid on a salary or fee basis (as opposed to an hourly basis); and (3) be paid at least $455 per week, which equates to $23,660 per year. If an employee is “highly compensated,” meaning that he or she earns at least $100,000 in total annual compensation, the employee may also be considered exempt under a relaxed version of the duties test. A highly controversial 2016 Obama-era rule attempted to double the existing salary threshold for white-collar workers (to $913 per week) and would have increased the annual compensation threshold to $134,004 for highly compensated individuals. That rule was enjoined by a Texas federal court, leaving 2004 thresholds in place. In the meantime, the DOL undertook to issue an overtime rule that would increase the salary threshold requirement, but not as high as under the 2016 rule. The final rule, announced September 24, 2019, is the result of that process and formally rescinds the enjoined 2016 rule.
The DOL’s new rule will implement several significant changes to current FLSA overtime requirements, including the following:
- White Collar Salary Threshold: The salary threshold required to meet the white collar exemption will increase from its current level of $455 per week (which equates to $23,660 per year) to $684 per week (which equates to $35,568 per year). As a result, employees who were previously exempt but earn less than $684 per week will now be eligible for overtime pay, unless their employers take action to increase their pay above the $684 per week threshold.
- Highly Compensated Employees: Highly compensated employees will be required to earn a total annual compensation of at least $107,432 per year ($684 of which must be paid weekly on a salary or fee basis) to qualify for exemptions. An employee who earns less than such amount will not be able to take advantage of the relaxed duties test for highly compensated employees.
- Bonuses and Commissions: Employers will be allowed to count non-discretionary bonuses, incentives, and commissions as up to 10% of the salary threshold of $684 per week, so long as such bonuses are paid at least annually.
The DOL intends to propose updates to these salary thresholds every four years. In contrast to the 2016 rule, the updates will not be automatic and will require notice and public comment periods. Further, the new rule makes no changes to the duties test for executive, administrative, and professional employees. Finally, the rule sets lower salary thresholds for employees in U.S. territories and the motion picture producing industry.
The rule will take effect on January 1, 2020. This leaves only a few months for employers to achieve compliance with the rule, by either treating employees who earn less than the salary threshold as non-exempt (and thus overtime eligible), or by boosting such employees’ pay to maintain their exempt status. Employers should consider taking the following steps:
- Identify all employees impacted by the rule (i.e., employees currently classified as exempt under a white collar exemption who earn between $455 per week (or $23,660 per year) and $684 per week (or $35,568 per year)).
- Determine the proper business actions to take with respect to each affected employee, such as whether to reclassify the employee as non-exempt, raise the employee’s salary to maintain exempt status, consider another FLSA exemption that does not require the employee to meet the new salary thresholds (such as the hourly computer professional exemption), or conduct a restructuring or a reassignment of work.
- Ensure timekeeping and payroll systems are updated to reflect new employee classifications.
- Consider whether to allow or adjust flexible or remote work schedules for exempt employees who become non-exempt, including whether to allow such employees to maintain use of a company cell phone or remote e-mail/network access.
- Consider whether to adjust fringe benefits to take into account increased payroll costs the new rule will potentially incur.
- If adjusting salaries or benefits, conducting layoffs, or taking related action as a result of the rule, ensure that all actions are nondiscriminatory and otherwise comply with applicable legal requirements, including providing WARN Act notices and complying with the release requirements under the Age Discrimination in Employment Act.
- Consider conducting a comprehensive wage and hour audit to correct any current FLSA misclassification issues, including those not related to the FLSA salary thresholds. As noted above, the salary threshold is only one of multiple requirements needed for an employee to qualify as exempt under a white collar exemption. If an employer has potential wage and hour vulnerabilities—such as employees who may not satisfy the duties test—now may be a good time to conduct an audit and consider whether to make reclassifications of those employees as well.
- Train newly non-exempt employees on timekeeping processes and their obligation to track their hours worked.
Employers should also be aware that their obligations under state wage and hour laws may differ from the FLSA, and should therefore ensure that their payroll policies and practices are compliant with state laws as well. For more information about the new rule, its expected impacts, or any other legal issues in the workplace, contact the authors of this article or the Hogan Lovells lawyer with whom you work.