On September 24, 2019, the U.S. Department of Labor announced a final rule to make an estimated 1.3 million American workers eligible for overtime pay by updating the salary threshold related to exempt employees under the Fair Labor Standards Act (“FLSA”). The salary threshold was last updated in 2004 despite a failed attempt to increase the minimum threshold in late 2016, at the end of the Obama administration.
The new final rule raises the salary threshold from $455 per week ($23,660 annually) to $684 per week ($35,568 annually). This is significantly less than the 2016 attempt which sought to raise the salary threshold to $913 per week ($47,476 annually). If this rule becomes effective, all employees who are paid a salary which falls below the salary threshold will be non-exempt employees and will therefore be eligible for overtime for all hours worked over 40 hours in a work week.
The final rule also raises the total annual compensation requirement for “highly compensated employees” from the current level of $100,000 per year to $107,432 (which includes at least a $684 per week paid on a salary or fee basis). This is significantly less than the March 2019 proposal which sought to raise the total annual compensation requirement for highly compensated employees to $147,414.
The Department of Labor also acknowledged evolving pay practices in the final rule by permitting employers to use nondiscretionary bonuses and incentive payments, which includes commissions, paid at least annually to satisfy up to 10% of the standard salary level.
The final rule does not include an automatic increase as suggested in previous proposals. Instead, the Department of Labor has stated that it intends to update the salary threshold and the highly compensated employee annual compensation levels more regularly in the future to ensure that these levels continue to provide useful tests for exemption. However, any proposed update would require notice-and-comment rulemaking.
The final rule is slated to take effect on January 1, 2020. As you may recall, we have all been through this before, in November 2016. While employers may be inclined to take a “wait and see” approach, we are just three months from the scheduled effective date. We will continue to keep you updated should there be any judicial intervention to block the implementation — like what we experienced in 2016. In the meantime, employers should work over the next few months to identify any exempt employees who are paid less than the new salary threshold and determine if those employees should be given a raise or reclassified as non-exempt.
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