Final Rule on Overtime Eligibility for White Collar Employees (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

On September 24, 2019, the Department of Labor revised a regulation issued under the Fair Labor Standards Act (FLSA) by updating the salary threshold that applies to the FLSA’s overtime exemption for executive, administrative and professional employees from $455 to $684 per week.  Absent an applicable exemption, an employer is required to pay 1½ times the employee’s regular rate of pay for all hours worked is excess of 40 hours per week.

Background Information

The DOL previously issued a final rule in May 2016 that updated the salary level for the white collar exemption from $455 per week ($23,660 per year) to $913 per week ($47,476 per year), increased the annual compensation threshold for highly compensated employees from $100,000 to $134,004 and included a mechanism to automatically update the salary and compensation levels every three years.  As employers were in the process of implementing the new rule in advance of its effective date (by raising salaries, converting employees from salaried to hourly and/or reorganizing workload), the final rule was challenged in court by business groups.  A U.S district court in Texas determined it was invalid because it moved to non-exempt status large numbers of individuals Congress intended to be exempt.  The DOL appealed the decision; however, the appeal was slow-tracked due to the intervening change in the administration.  Therefore, the previously issued final rule never went into effect and the DOL had been working on a new rule with a new standard.   

New Final Rule

The final rule includes the following provisions:

  • Raises the salary level to $684 per week ($35,568 per year)
  • Increases the highly compensated annual compensation threshold to $107,432 per year
  • Allows employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10% of the salary level (no change to how employers may use bonuses to meet the highly compensated annual compensation threshold)

In order for an employer to credit nondiscretionary bonuses and incentive payments towards the salary level, such payments must be made at least annually.  If an employee does not earn enough in nondiscretionary bonus or incentive payments to meet the salary level in a 52-week period, the employer must make a catch-up payment within one pay period in order for the employee to maintain exempt status.

The final rule does not contain an automatic mechanism to adjust the salary level and highly compensated threshold; however, the DOL has stated that it intends to update these amounts more regularly in the future through notice-and-comment rulemaking.

Other FLSA Provisions Remain Unchanged

The salary level is just one of three criteria for the FLSA white collar exemption.  The other two criteria remain unchanged.  They are:

  • The employee must be paid on a salary basis not subject to reduction based on the quantity/quality of work (salary basis test)
  • The employee’s primary job duty must involve the kind of work associated with exempt executive, administrative or professional employees (standard duties test)

For the administrative exemption to apply, the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or its customers.  In addition, the employee’s primary duty must include exercise of discretion and independent judgment with respect to matters of significance.

For the executive exemption to apply, the employee’s primary duty must include managing the enterprise or a department of the enterprise, regularly directing the work of at least 2 full-time employees and having the authority to hire, fire and promote other employees.

The professional exemption applies to a:

  • Learned professional with advanced knowledge in a field of science or learning, customarily acquired by a prolonged course of specialized learning
  • Creative professional where the work requires invention, imagination or talent in a field of artistic or creative endeavor

The circumstances in which an employer may make deductions from pay of an exempt employee remain unchanged.  An exempt employee must receive the full weekly salary for a week in which the employee performs any work except in the following situations:

  • Absence of one or more full days for personal reasons other than sickness or disability
  • Absence of one or more full days for sickness or disability in accordance with a bona fide policy
  • Penalties imposed in good faith for infraction of safety rule of major significance
  • Unpaid disciplinary suspensions of one or more full days imposed for infractions of a written workplace conduct rule
  • Proportional payment in first or last week of employment
  • Weeks in which employee takes any amount of unpaid FMLA leave

Effective Date

The effective date of the final rule is January 1, 2020.  Many employers had already made changes in 2016 before the previous final rule was invalidated.  However, employers should once again analyze how many employees who are currently treated as exempt will fall below the new $684 per week salary level and take action to adjust employees’ salaries or reclassify them to a status that tracks hours worked and pays overtime for hours worked in excess of 40 per week.