The Department of Labor’s Wage and Hour Division has issued a final rule regarding the threshold amount of salary necessary to exempt an employer from the obligation to pay overtime. The threshold has not changed since 2004 when it was set at $455 per week ($23,660 per year).
You may recall that in 2016, the Obama administration proposed a change to the 2004 rule that increased the threshold to $913 per week ($47,476 per year). Litigation ensued and a federal court in Texas issued an injunction, upheld by the Fifth Circuit, putting a hold on that rule. The Trump administration made clear it was not a fan of the $913 threshold and has taken some time to determine what changes it felt were appropriate. Most people felt that the DOL would propose a salary threshold increase — just not quite so drastic.
On Sept. 24, the waiting ended, and the DOL issued a new rule that raises the salary threshold to $684 per week ($35,568 per year). That means that if an employee is paid a salary of that amount, they may qualify to be exempt from overtime under the executive, administrative or professional categories (if they meet the duties requirements as well). The justification for the new threshold is based on calculations that wages have risen by 50% since 2004, hence the 50% increase in the salary standard. This new rule is expected to affect over a million workers across the country and goes into effect on Jan 1.
Other changes to the rule
In addition to increasing the salary threshold, the new rule also raises the total annual compensation level necessary to meet the “highly compensated” exemption from overtime. The new level is $107,432 per year.
The new rule allows employers to use annual nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10% of the standard salary level for all exemptions. If those bonuses, incentives and commissions do not get the employee over the $35,568 threshold, the employer can make a one-time “catch-up payment” and avoid losing the exemption altogether. Under the Obama administration’s proposed rule, the catch-up payment had to be made and calculated on a quarterly basis. Beginning January 2020, the catch-up payment is calculated for the entire 52-week period. So, if at the end of the 52-week period an exempt employee received less than $35,568, the employer can make a payment to reach the threshold, as long as it makes the payment no later than the next pay period after the 52-week period. Employers should monitor an employee’s salary closely, especially for employees who are working on incentives, as this catch-up window is short. If you miss the window, the exemption is lost, and overtime back pay is due for any time worked over 40 hours in one week.
What does this mean?
Overall, the new rule should be a good opportunity for employers to do a self-audit of all their exempt employee classifications. Back in 2016, many employers raised exempt employee annual rates to the $47,476 threshold. While employers may now lower that level to $35,568, you should consider how lowering some exempt employees’ salaries could impact employee morale. (Hint: It would probably lower morale). On the other hand, if the employee’s salary is below $35,568, employers should weigh the costs of the employee’s average overtime against the costs of raising the employee’s salary to the new threshold.
That being said, it is important to note that the amount of salary is not the ONLY thing that has to be shown to qualify for this exemption. Exempt employees must also meet the duties requirements for exemption in each category (check out the DOJ regulations at 29 C.F.R. §§ 541.100–541.710). Between now and Jan. 1, 2020, employers should work with their employment counsel to implement a plan.
The original article, "What You Need to Know About New Overtime Regulations," appeared in the Birmingham Business Journal on November 7, 2019.