On September 27, 2019, the U.S. Department of Labor (“DOL”) published its long-awaited final rule that will update the salary thresholds for “white-collar” exemptions (e.g., executive, administrative, professional employees) as they relate to overtime compensation laws. The final rule will take effect January 1, 2020, and increases the salary level threshold to $684 per week (equivalent to $35,568 annually). Employers need to act quickly to make decisions regarding any employees impacted by the new rule to ensure compliance with the final rule.
The final rule will impact employers and employees in four main ways:
- Salary Threshold Increase for White Collar Exemptions. Under the new rule, employers will be required to pay employees a weekly salary of $684 (or $35,568 annually) to be exempt from overtime compensation requirements. This is nearly $11,000 more per year than the currently required salary level of $23,660. This increase would reclassify roughly 1.3 million American workers as non-exempt and make them newly eligible for overtime.
- Ten Percent Rule. The new rule adopts a Ten Percent Rule, which allows employers to satisfy up to 10% of an employee’s compensation by way of non-discretionary bonuses and incentive payments. To qualify for 10% of compensation, bonuses and incentive payments must be made at least annually. The DOL believes that the Ten Percent Rule adequately encompasses evolving and modernized pay practices.
- Highly Compensated Employees’ Salary Threshold Increase. The new rule also raises the total annual compensation threshold for “highly compensated employees” to $107,432. This is a $7,432 increase from the current threshold of $100,000. Employers are not restricted to the Ten Percent Rule when dealing with a highly compensated employee. To qualify as a highly compensated employee, employees must still receive at least $684 per week as a guaranteed salary but can earn the remaining portion of their annual compensation through payments such as bonuses, commissions, and other incentive payments. If an employee’s annual earnings are not enough to maintain the employee’s tax-exempt status, the employer may make a one-time “catch-up payment” to reach the threshold amount on the preceding year’s earnings.
- No Automatic Increases. These salary threshold levels were last increased in 2004. The Obama administration proposed an increase in 2016. However, that rule was judicially challenged in large part due to the rule’s provision that would have imposed automatic annual increases to the salary threshold. The DOL has confirmed that the final rule will not be subject to these annual automatic increases. It does, however, intend to be more consistent about regularly updating these salary thresholds in the future, using notice-and-comment rulemaking, to keep pace with modern pay practices and accurately reflect fluctuating statistics.
Again, the final rule takes effect on January 1, 2020—not leaving employers much time to determine how it will adjust to ensure compliance in the upcoming year. Employers need to take proactive steps and work with experienced counsel to navigate the financial impact of these changes, including whether it should make pay adjustments or reclassify currently exempt employees that would not meet the increased salary threshold. Once these determinations are made, employers need to make sure to communicate these decisions to any affected employees.
If you have any questions on this topic or need assistance navigating these changes, please contact our Labor & Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to get the latest HR news, tips, and updates.