Dinse Brief: Final Overtime Rule on Minimum Salary Level for Exempt Employees

Earlier this week, the U.S. Department of Labor (DOL) released its final rule increasing the minimum salary level for workers to qualify as exempt employees under the Fair Labor Standards Act (FLSA).  The DOL estimates that 1.2 million additional workers will be entitled to overtime pay as a result of this increased salary level.

As a reminder, an employee is exempt from the overtime pay requirement of the FLSA if three conditions are satisfied: (1) the employee is paid a predetermined fixed salary each pay period that is not subject to reduction because of the quantity or quality of his/her work; (2) the employee is paid no less than a specific minimum salary threshold; and (3) the employee primarily performs job duties that qualify as professional, executive or administrative white collar work, as defined by the FLSA regulations.  The final rule focuses only on the second condition: the salary threshold.

Specifically, the final overtime rule increases the salary threshold level from $455 per week to $684 per week.  This equates to a salary level of $35,568 annually.  The final rule also allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new salary level.  If the nondiscretionary bonuses and incentive payments in a given year (52 week period) are insufficient to meet the salary threshold required for exempt status, an employer must make a “catch-up” payment within one pay period of the end of the 52 week period.  If the employer chooses not to make a “catch up” payment, the employee will be entitled to overtime pay for any overtime hours worked during the entire prior year.

The final rule also increases the total annual compensation threshold for Highly Compensated Employees from $100,000 per year to $107,432 per year, of which $684 must be paid on a weekly or fee basis.  Employers of Vermont employees, however, should not rely on this FLSA exemption, since Vermont law does not recognize it.

Unlike the DOL’s ill-fated prior attempt in 2016 to increase the salary threshold for exempt employees, the current final rule does NOT provide for a mechanism for automatically updating the salary level.  Instead, the DOL intends to update the salary threshold more regularly in the future through notice-and-comment rulemaking.

The effective date of the final rule is January 1, 2020.

Employers should immediately review the salary levels of their exempt employees. For those employees who are paid below the new salary threshold, employers will need to determine whether to reclassify the employees as nonexempt, or increase their current salary level to maintain the employees’ exempt status.  Simultaneously, employers will need to consider whether the new rule will create salary compression issues; whether staff should be added to limit overtime liability for newly classified nonexempt employees; whether policies should be implemented to limit remote work or restrict work beyond 40 hours in a single workweek for newly classified nonexempt employees; and whether work flow will be hampered in any way.  Employers will also need to develop a robust and comprehensive communication and training program to manage the workplace changes that will result from the final rule.

For more information on the final rule, or for assistance in evaluating the rule’s impact on your organization, please contact:

Amy McLaughlin amclaughlin@dinse.com

Karen McAndrew kmcandrew@dinse.com

Kendall Hoechst khoechst@dinse.com