In case you missed it, the U.S. Department of Labor (DOL) issued the final version of its long-awaited overtime exemption rules, replacing the previously-enjoined 2016 rule (Rule)1. The full text of the changes to the overtime exemption rules can be found here.
The final rule, which will take effect on January 1, 2020, updates the Fair Labor Standards Act’s salary requirements for the executive, administrative, and professional (EAP) workers’ exemptions and revises one of the requirements for the white-collar exemptions—the “salary basis” test.
The DOL initially proposed the new rule on March 7, 2019 Notice of Proposed Rulemaking. Based on the comments it received, the DOL revised various thresholds and provisions from its initial proposed rule. The DOL’s final rule includes:
- An increase in the salary threshold for workers to qualify for one of the EAP exemptions from a rate of at least $455 per week ($23,660 annually) to a rate of at least $684 per week ($35,568 annually). The $684 per week figure is $5 more per week than the DOL’s initial proposed Rule from March 2019, but remains significantly less than the $913 per week threshold proposed in the Obama Administration’s 2016 rule.
- An increase of the annual minimum compensation for “highly compensated employees” from $100,000 to $107,432. This is a significant reduction from the $147,414 threshold set forth in the DOL’s initial proposed Rule March 2019 (such employees also must be paid on a salary basis at a rate of at least $684 per week).
- Both the new annual salary rate of $35,568 and the highly compensated annual salary rate of $107,432 per year can be satisfied in part via commissions, incentives, and/or non-discretionary bonuses. However, there are some limitations:
- For employees who do not meet the highly compensated threshold of $107,432, up to 10 percent of their required annual salary of at least $35,568 per year can be met via commissions, incentives, and/or non-discretionary bonuses, so long as they are paid during the calendar year (or any fixed 52-week period) or no later than the first pay period after the end of that year.
- For employees to meet the highly compensated threshold of $107,432 per year, the annual compensation requirement can be satisfied via commissions, incentives, and/or nondiscretionary bonuses so long as they are paid during the calendar year (or any fixed 52-week period) or no later than one month after then end of the calendar year (such payments are not capped at 10 percent).
- In both cases, payments paid made after the end of the applicable year count only toward meeting the salary requirements for the prior year, and not the year in which they are made.
Additionally, the DOL initially proposed committing to increase to the salary threshold every four years. After reviewing public comments, however, the DOL declined to commit to the strict four-year timeline, instead stating that “economic conditions, rather than fixed timelines, should drive future updates,” while also recognizing that updates should be made more frequently than the 15-year gap since the previous update.
Given the new thresholds in the final rule, employers should take the following steps if they have not already done so:
- Determine whether any currently exempt employees will lose that status as of January 1, 2020 and consider increasing their salaries or providing other compensation that would be needed to continue their exempt status.
- Examine pay practices to confirm that non-exempt employees continue to meet the primary duties test (which is not changing, but remains essential to exempt status).
- In November 2016, U.S. District Court for the Eastern District of Texas enjoined the DOL from implementing and enforcing the Rule, finding that the DOL had overstepped its authority by increasing the salary limit so dramatically and basing the exemption exclusively on salary. On November 6, 2017, the U.S. Court of Appeals for the Fifth Circuit held the appeal in abeyance pending further rulemaking regarding a revised salary threshold.