A final rule that increased the minimum salary required to be considered exempt from overtime under the Fair Labor Standards Act (FLSA) took effect January 1, 2020. If your exempt employees' salaries fell below the new federal salary requirement, you may have had to:
- Raise their salaries to the new requirement (if you elected this option, be sure to 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.
Background:
The 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. Note: Some states require overtime pay in additional circumstances. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain "exempt" administrative, professional, and executive employees. To be considered "exempt," these employees must generally satisfy three specific salary and duties tests:
- The employee must receive a minimum salary each week;
- With very limited exceptions, the employer must pay the employee their full salary in any week they perform work, regardless of the quality or quantity of the work; and
- The employee's primary duties must meet certain criteria.
There is also an exemption for "highly compensated" employees who receive at least a certain amount in total compensation each year and customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee.
Changes Effective January 1, 2020:
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 increased 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 can 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 increased 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 didn't change under the new rule. Thus, if 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).
State Rules:
Keep in mind that some states have their own salary requirements that already exceed the new federal rule. For instance, California's minimum weekly salary requirement for the administrative, professional, and executive exemptions in 2020 is $1040 per week for employers with 26 or more employees and $960 per week for employers with fewer than 26 employees.
Some other states may decide to increase their salary thresholds or make other changes to their exemption tests in 2020 and beyond. For instance, the state of Washington recently released a final rule that will increase the minimum salary requirement for exemption and make changes to the duties tests under state law. A handful of states are considering similar changes.
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 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.
Compliance Recommendations:
Exempt employees must meet the applicable duties test and receive a salary of at least $684 per week under federal law. For non-exempt employees, 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. For more information, tools, and resources on the new rule, visit our FLSA Guide.
