FLSA & Overtime Rule Guide

Background:

The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs. These employees are known as "exempt" employees. To be considered "exempt," these employees must generally satisfy three tests:

salary-level test

1. Salary-level test

Until January 1, 2020, employers must pay employees a salary of at least $455 per week to qualify for the executive, administrative, and professional employee exemptions.

salary-basis test

2. 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

3. Duties test

The employee’s primary duties must meet certain criteria.

There is also a special exemption for "highly-compensated employees" who are paid a total annual compensation of at least $100,000 (increasing January 1, 2020) and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.

Final Rule Effective January 1, 2020:

New salary requirements:

On September 24, 2019, the Department of Labor released a final rule that will increase the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions from $455 per week to $684 per week ($35,568 annually).

Employers will also be permitted 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 their exempt executive, administrative, or professional 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 employees:

The final rule increases the total annual compensation requirement for the "highly compensated employees" 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).

Learn more: New Overtime Rule Effective January 1, 2020: How to Prepare

Steps to Consider Now:

#1: Ensure that your "exempt" employees are properly classified under existing rules.

Take this opportunity to review all exempt classifications to ensure that employees still qualify under the existing duties tests.

#2: Evaluate potential costs.

Evaluate the potential impact on your business by comparing the costs of raising an exempt employee's salary to reclassifying the employee as non-exempt and paying them overtime when they work more than 40 hours in a workweek. If an employee's salary is well below the new minimum and they rarely work overtime, it may be more cost-effective to reclassify them as non-exempt. Conversely, if an employee's salary is closer to the new proposed minimum or they frequently work overtime, you may want to consider raising their salary to maintain the exemption.

These options are covered in further detail below:

If you have exempt employees who are paid less than the new minimum, you can raise their salaries to meet the new requirement. If you elect this option, it is a best practice to review their job duties to ensure they continue to qualify for an exemption. Additionally, make sure exempt employees' job descriptions accurately reflect current responsibilities.

Note: If you provide your exempt employees with nondiscretionary bonuses, incentive payments or commissions, factor this in when calculating the potential costs of raising their salaries to meet the new requirement. Under the final rule, employers must pay at least 90 percent of the minimum (or $615.60) in the form of salary each week and then would be allowed to apply nondiscretionary bonuses, incentive payments, and commissions toward up to 10 percent of the minimum (or $68.40), provided these types of compensation are paid at least annually. For example, an employer could satisfy the minimum salary requirement by paying an employee a weekly salary of $615.60 and then a year-end productivity bonus of $3,556.80 ($68.40 x 52 weeks).

If exempt employees don't meet the new salary requirement, you can reclassify them as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek. If these employees rarely work more than 40 hours per week, simply convert their salary to an hourly wage (divide their weekly salary by 40 hours). However, if these employees regularly work more than 40 hours per week and you want to keep your compensation costs the same, then you would need to account for the overtime premium when you reclassify them as non-exempt. To see an example, visit our FAQs and select Would these options increase my compensation costs?" in the Options to Consider section.

Note: Employers have the option of paying non-exempt employees on a salary basis as long as the employee is paid at least the minimum wage for all hours worked and overtime when he or she works over 40 hours in a workweek. If you pay non-exempt employees on a salary basis, you must ensure that all time worked is accounted for and that the employee is paid overtime when due. Learn more.

Learn more: FAQs: Reclassifying Employees to Comply with New Overtime Rule

Learn more: New Overtime Rule: Evaluating Your Options for Compliance

#3: Keep an eye on state rules.

Some states have their own salary requirements 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 particular situation.