The Department of Labor ( DOL) recently finalized changes to its overtime exemption thresholds for salaried employees, including an increase in the annual salary cut-off from $23,660 to $35,568. The changes are expected to take effect on January 1, 2020.
The DOL provides a “white collar” exemption from overtime rules under the Fair Labor Standards Act (FLSA) for executive, administrative, and professional salaried employees who make over a threshold amount of money. The current rate was set at $23,660 per year (or $455 per week) in 2004, when President George W. Bush’s Administration last successfully updated the rules. This provision of the Rule also includes a “highly compensated employee” exemption currently set at $100,000.
How it Works
The white collar exemption from overtime may be appropriate for a salaried executive, administrative, or professional employee if the employee’s position meets three tests: 1) the salary level test; 2) the salary basis test; and 3) the duties test. Each of these tests has its own requirements, and each of the tests must be met for an employee to be exempt.
- Salary Level Test: This test is the one most directly impacted by the changes. Using the salary level test, executive, administrative, and professional salaried employees who make less than proposed salary amount of $35,568 per year (or $684 per week) are non-exempt from the overtime rules.
- Salary Basis Test: This test is used to determine if an employee is truly paid on a “salaried” basis for the purposes of overtime exemption. To qualify as a “salaried” employee, the person must be paid a predetermined fixed amount that does not go up or down based on either quality or quantity of the employee’s work. The employee’s pay must be above the amount determined in the salary level test, must be fixed, and must be paid on a regular basis (i.e., bi-weekly). Typically, the employee does not earn overtime and cannot refuse to work overtime.
- Duties Test: To qualify for an exemption to overtime, the executive, administrative, or professional salaried employee must also perform exempt job duties, including the following:
- Executive: The employee regularly supervises two or more employees, with management as the primary duty of their position, and the employee has genuine input into the job status of other employees.
- Administrative: The employee engages in office or non-manual work directly related to management or general business operations of the employer or the employer’s customer. A primary component of the employee’s work must involve the exercise of independent judgment and discretion about matters of significance.
- Professional: The employee engages in work that is predominantly intellectual in nature and requires specialized education and the employee’s position involves the exercise of discretion and judgment.
In the event that an executive, administrative, or professional salaried employee does not meet the criteria for all three tests, they will be non-exempt from overtime, unless the employee meets the requirements of a “highly compensated employee.”
Upcoming Changes to the Exemption
- Highly compensated employee test: If an executive, administrative, or professional salaried employee currently earns $100,000 a year or more, the employee’s primary duties include office or non-manual work, and the employee customarily and regularly performs at least one of the duties or responsibilities listed under the duties test for executive, administrative, or professional salaried employees, then the highly compensated employee is exempt from overtime.
What Happens Next
- Salary level increase: The changes to the rule increase the annual salary cut-off from $23,660 per year (or $455 per week) to $35,568 per year (or $684 per week);
- Bonuses and incentives: The changes to the rule allow nondiscretionary bonuses and/or incentive payments (e.g. commissions) paid on an annual basis, or more frequently, to be calculated as part of the “salary,” up to 10% of the standard salary level;
- Highly compensated employees: The changes to the rule also increase the annual salary cut-off for highly compensated employees from $100,000 a year to $107,432 (this amount must reflect a weekly payment of $684 on a salary or fee basis).
With the effective date of January 1, 2020 just around the corner, employers face potentially challenging and expensive decisions. The changes to the rule are estimated to make approximately 1.3 million salaried employees non-exempt based on current salary levels. The question facing thousands of employers across the nation is how to respond to, and prepare for, the upcoming changes.
To the extent an employer has currently exempt employees earning less than the new threshold amount of $35,568 per year (or $684 per week), the employer has to determine its best course of action. The main options are somewhat limited to either raising salary levels to meet the new threshold or paying overtime to the soon-to-be-non-exempt employees.
This is an excellent opportunity for organizations to review the salary data of the currently exempt salaried workforce to determine the scope of the possible financial impact of the upcoming changes. In addition, it is a good time to review the expected and actual job duties of its currently exempt workforce to ensure that those duties are in line with the duties tests for its executive, administrative, and professional salaried employees. Review of the potential financial impact and current duties will help inform the decision to either increase salary levels or convert positions to non-exempt.
Procedurally, the “final” rule is not final just yet. There may be some minor, likely inconsequential changes (e.g. formatting), before the rule is published in the Federal Registrar. We will continue to track the progress of the rule as the changes go into effect and keep you informed of any developments. As always, our team at Bullard Law is here to help if you have any questions related to this development.
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