As most employers are aware, properly classified exempt employees are not eligible for overtime pay under the federal Fair Labor Standards Act (FLSA) for hours worked over 40 in a workweek. Non-exempt, hourly employees, however, must be paid time and one-half for any hours worked more than 40 in a workweek. Employers are reminded that, in September 2019, the Department of Labor released its final rule for determining overtime eligibility under the FLSA. The final rule became effective on January 1, 2020, and employers are now expected to be in compliance.
To recap, the final rule updated the earnings thresholds necessary to exempt executive, administrative and professional employees from the FLSA’s minimum wage and overtime pay requirements. More specifically, the rule raised the standard salary level from the previous level of $455 per week (equivalent to $23,660 per year for a full-year worker) to $684 per week (equivalent to $35,568 per year for a full-year worker). The new rule also raised the total annual compensation requirement for “highly compensated employees” from the previous level of $100,000 per year to $107,432 per year.
Importantly, the new rule allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary threshold. To qualify, these payments must be paid at least annually.
The new rule does not address periodic increases to the salary thresholds, although the Department of Labor intends to propose updates to the salary threshold regularly to ensure that these levels continue to provide useful tests for exemption. Updates are not automatic and would require notice-and-comment rulemaking, so employers need not worry about changes to the salary thresholds any time soon.
The rule is estimated to extend overtime protections to more than one million workers who were not previously eligible for overtime wages under federal law. For this reason, employers are advised to review the salaries of their exempt employees as soon as possible to ensure compliance with the new rule. Specifically, employers should determine whether to increase the salaries of exempt employees earning less than $684 per week or convert them to non-exempt employees. Employers should also determine whether such employees are paid nondiscretionary bonuses and incentive payments that may count toward the new salary thresholds. To the extent employers decide to convert employees from exempt to non-exempt, one cost-saving consideration is to closely monitor overtime worked by the newly categorized employees. To the extent overtime can be limited or capped, such measures may help minimize the impact of a reclassification.
Employers are also reminded that meeting the salary threshold does not automatically make an employee exempt from overtime pay; employees must also fulfill one of the exemptions in the standard duties test.
Finally, employers are advised to consult with local counsel regarding any state-specific laws that may be applicable and which are in addition to those imposed by the FLSA.