On September 24, 2019, the U.S. Department of Labor announced its long-anticipated Final Rule on exemptions and overtime under the Fair Labor Standards Act (FLSA). The new rule takes effect January 1, 2020. It increases the salary thresholds necessary to exempt executive, administrative, or professional employees from the FLSA’s minimum wage and overtime pay requirements from $455 to $684 per week (equivalent to $35,568 per year for a full-year worker). It also allows employers to count a portion of certain nondiscretionary bonuses and commissions towards meeting that salary level: this will allow an employer to “catch up” an employee’s earnings at year end so the employee qualifies for the exemption. The total annual compensation level for highly compensated employees (HCE) is increased from the currently-enforced level of $100,000 to $107,432 per year.
The variable pay component cannot exceed more than 10% of each employee's total pay. In addition, if an employee does not earn enough in non-discretionary bonuses and incentive payments (including commissions) in a given 52-week period to retain his or her exempt status, DOL permits a "catch-up" payment at the end of the 52-week period. This gives an employer one pay period to make up for a shortfall of up to 10% of the standard salary level for the preceding 52-week period. DOL did not make any revision to the separate duties test, which exempts workers from overtime if their primary duties involve supervisory functions or require advanced knowledge, provided they also earn more than the minimum salary level.
The new rule is expected to draw a legal challenge from worker advocates, as an earlier Obama-era proposed regulation would have doubled the salary threshold to $47,500 and automatically updated it every three years.
Employers will need to weigh the cost of raising employee salaries above the new threshold against the cost of reclassifying them as non-exempt and paying overtime. Such changes will necessitate a communication strategy as employees tend to like salaried status, including the benefit levels that often come with salaried employees. The changes could be explained as based on the new government rules. If employees are reclassified as hourly, employers will need to track work time and pay appropriate overtime premiums. Another potential solution is to keep employees on salary and pay one-half time overtime on a fixed pay for fluctuating hours arrangement. The latter arrangement should only be used with legal advice.