Department of Labor Issues New Overtime Rules

The Department of Labor (DOL) issued its highly anticipated final rule, modifying the exemptions to the Fair Labor Standards Act (FLSA) overtime rules for certain white collar employees (executive, administrative, professional, and computing positions) and highly compensated employees.

Many readers may remember the Obama Administration first attempted to issue new rules, only to have them blocked by a federal court injunction on the eve of their effective date. Rather than continuing the legal fight in support of the Obama Administration’s rules, the DOL, under the Trump Administration, decided to walk away from those rules and instead began the rulemaking process anew – which ultimately led to this latest set of final rules.

The final rule, which goes into effect on January 1, 2020, increases the minimum salary employees must be paid to qualify for the white collar or highly compensated exemptions. However, as described further below, these increases are significantly smaller than those that were enacted, but never went into effect, under the Obama Administration. The new rules also do not make any changes to the duties tests associated with the exemptions.

The key regulatory changes embodied in the final rules are as follows:

  • On January 1, 2020, the salary threshold for the white collar exemption will increase approximately 50% from the current $455 per week (or $23,660 annually) to $684 per week (or $35,568 annually).
The DOL calculated the new salary threshold based on the 20th percentile of weekly earnings for full-time salaried workers in the lowest paid Census Region (currently the South) as calculated by Bureau of Labor Statistics (BLS).  Thus, although the $684 per week was calculated based on the average salaries in the South, the thresholds will apply to the whole country.  This is the same mythology that the Obama-era rules used, however, those rules used the 40th percentile rather than the 20th.
  • On January 1, 2020, the salary threshold for the highly compensated will increase from $100,000 annually to $107,432 annually.
This increase is significantly lower than that proposed by the DOL in March.  Under the proposed rule, the threshold would have been increased to $147,414 (the 90th percentile of weekly earnings nationally).  DOL decided the lower the threshold to the 80th percentile of weekly earnings nationally, thus arriving at the $107,432 annual rate. 
  • The salary thresholds for the white collar and highly compensated exemptions will not be subject to automatic increases.
The Obama-era rules marked the first time that the regulations included a system for automatically increasing the salary thresholds.  In the new final rule the DOL has abandoned this concept and instead simply committed to more regularly updating the salary thresholds through the notice and comment process.
  • Under the new rule, employers will be permitted to count non-discretionary bonuses and incentive compensation (including commission) towards up to 10% of the white collar salary threshold as long as the payments are made at least annually.
Under the preexisting rules, employers were not permitted to include any types of bonuses or incentive compensation in calculating whether an employee’s compensation meets the white collar salary threshold. 

The Obama-era rules introduced the notion of allowing employers to satisfy a portion of the white collar salary threshold through non-discretionary bonuses or incentive compensation.  The only difference between the Obama-era rules and the new final rules is that, while the Obama rules required that these payments be made at least quarterly to qualify, the new rules only require payment of the bonuses or incentive compensation on an annual basis. 
  • The new rule will make no changes to the duties tests for the white collar or highly compensated exemptions.
As with the Obama-era rules, the DOL did not propose or make any changes to the duties tests, which, together with the salary threshold, apply to qualify an employee for the white collar or highly compensated exemptions.

Bringing together the preexisting rules with the new rules going forward:
  • To be exempt under a white collar exemption, an employee’s primary duties must be executive, administrative, professional, computing, or outside sales (as defined by regulation) and the employee must be paid a salary of at least $684 a week. Employees in computer-related positions can either be paid a salary of at least $684 a week or on an hourly basis at a rate of no less than $27.63 (unchanged by the final rule). 
  • To be exempt as a highly compensated employee, the employee must regularly and customarily perform one or more of the duties of an executive, administrative or professional employee (as defined by regulations) and the employee must earn at least $107,432, which includes at least $684 per week on a salary basis.
  • Although outside sales employees are generally included in the definition of white collar employees, they are not subject to the same salary thresholds as other white collar employees so, because the new regulations do not impact the duties test, the exemption for outside sales employees is unchanged by these regulations. 
From a financial standpoint, this will largely require businesses to make an employee-by-employee assessment of the amount of overtime a particular employee works versus the amount the employee’s salary would need to be increased to meet the new threshold. Of course, businesses can place strict limitations on the amount of overtime it will allow a newly non-exempt employee to work in order to avoid increased payroll costs. However, this will need to be balanced with productivity concerns, particularly where the employee has traditionally worked significantly more than forty hours per week. For employers who do end up reclassifying employees as non-exempt, they will also have to start tracking hours in order to calculate when and how much overtime is due.

While the new rules do not make any changes to the duties tests, businesses that are evaluating employee exemptions will also want to make sure all employees they are classifying as exempt meet both the pre-existing duties tests and the new salary thresholds.

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