The Department of Labor (DOL) has released a final rule that will increase the minimum salary requirement to be considered exempt from overtime under the Fair Labor Standards Act (FLSA). The final rule takes effect January 1, 2020. Below is an overview of the new rule and guidelines to help you prepare.
The FLSA requires covered employers to pay "non-exempt" employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek. Some states require overtime pay in additional circumstances. Check your state law for more information.
While most employees are "non-exempt," the FLSA provides for exemptions from its minimum wage and overtime requirements for certain administrative, professional, executive, outside sales, and computer professional employees. These employees are known as "exempt" employees. To be considered "exempt," employees must generally satisfy all three of the following tests:
- Salary-level test: Employees must earn a weekly salary that meets the minimum requirements. Until January 1, 2020, the minimum salary requirement is $455 per week for the administrative, professional (including the salaried computer professional), and executive exemptions.
- Salary-basis test: With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test: The employee's primary job duties must meet certain criteria.
There is also an exemption for "highly compensated" employees who customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee. Until January 1, 2020, these employees must receive a total annual compensation of at least $100,000 to qualify for this exemption.
What Is Changing?
Minimum Salary for Administrative, Professional, and Executive Exemptions:
Effective January 1, 2020, the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions will increase from $455 per week to $684 per week (equivalent to $35,568 per year).
This means that in order to qualify for one of these overtime exemptions, employees must be paid a weekly salary of at least $684 and continue to satisfy the applicable duties tests. Exempt computer employees may also be paid hourly, if it is at least $27.63 per hour, which doesn't change under the new rule.
Inclusion of Nondiscretionary Bonuses in Minimum Salary Requirement:
Beginning January 1, 2020, employers will be allowed to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least annually.
The final rule permits employers to make a final "catch-up" payment within one pay period after the end of year to bring an employee's compensation up to the required level. For example, if an employer chooses this option, each pay period the employer must pay the employee at least 90 percent of the salary level ($615.60 per week). Then, if at the end of the year, the employee's paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) does not equal at least $35,568, the employer would have one pay period to make up for the shortfall.
Highly Compensated Employee Exemption:
The final rule increases the total annual compensation requirement for the "highly compensated employee" exemption to $107,432 per year (at least $684 must be paid on a weekly salary basis).
For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement, but there is no 10 percent cap like the other exemptions. This won't change under the new rule. Thus, as long as the employer pays the employee at least $684 on a weekly salary basis, the employer will be able to count these other forms of compensation toward meeting the minimum total compensation requirement ($107,432 per year).
No Changes to Duties Tests:
The DOL didn't make changes to the duties tests.
Future Minimum Salary Increases:
The DOL intends to update the minimum salary requirements more regularly, using the same rulemaking process, which involves publication in the federal register and an opportunity for public comment.
Potential Impact on Exempt Employees:
If your exempt employees earn less than the new salary requirement, they will no longer meet exemption criteria and must be classified as non-exempt. This means that they would be entitled to overtime whenever they work more than 40 hours in a workweek. An employee who meets all applicable exemption criteria, including the new minimum salary requirement, salary-basis test, and applicable duties test, may continue to be classified as exempt.
Note: Some states have their own salary requirements (and duties tests) that already exceed the new federal rule. Some other states may decide to increase their salary thresholds based on the new federal rule. Review both federal and state law to determine whether an employee may be classified as exempt from overtime. If an employee is covered by both the federal and state law but doesn't meet both sets of tests, consult with counsel to determine how you should classify the employee in that situation.
Options for Compliance with New Federal Rule:
If your exempt employees' salaries fall below the new federal salary requirement, you will generally either have to:
- Raise their salaries to the new requirement (if you elect this option, review employees' job duties to ensure they continue to qualify for the applicable exemption); or
- Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.
These options will be covered in detail in our next Tip of the Week.
Steps to Take Before January 1, 2020:
- Evaluate your options. Use our calculator to help estimate and compare the costs of the options covered above. Remember, you don't have to choose the same option for all employees. Depending on their typical work hours, it may make sense to reclassify some employees as non-exempt and raise other exempt employees' salaries to meet the new minimum (provided they still satisfy the duties tests).
- Communicate changes. Once you have decided what changes you will make, communicate them to impacted employees as early as possible. Check your state law for any specific timeframes for providing such notice.
- Review timekeeping practices. If you will be reclassifying employees to comply with the new rules, ensure that you have systems in place to accurately record all work hours. Under the FLSA, hours worked includes not only time spent working, but also certain nonproductive time, such as rest breaks, travel time, and training time. Exempt employees may not be accustomed to tracking this time and may be used to working after hours. Train them on your timekeeping policies and procedures and expressly require employees to record all working time.
- Implement changes by January 1, 2020. Employees who are classified as exempt must receive a salary of at least $684 per week by January 1, 2020. However, many employers don't have workweeks that will begin on January 1, 2020, which is a Wednesday. In such cases, the best practice would be to implement salary increases at the beginning of the workweek so that exempt employees are paid at least $684 for the workweek that includes time worked on or after January 1, 2020. If you intend to apply nondiscretionary bonuses toward meeting up to 10 percent of the salary requirement, make sure you provide the bonus at least annually. For employees reclassified as non-exempt, make sure you pay them at least the minimum wage for all hours worked and overtime whenever they work more than 40 hours in a workweek.
Check back for future Tips on the overtime rule, including a detailed analysis of each compliance option and how to communicate classification changes to your workforce. In the meantime, visit our FLSA Overtime Rule Guide for more information and resources to help you prepare for these changes.