Be Ready to Comply with DOL’s New Overtime Rule
On September 24, 2019, the U.S. Department of Labor (DOL) announced its final overtime rule, making an additional 1.3 million workers eligible for overtime pay under the Fair Labor Standards Act (FLSA). The final rule becomes effective January 1, 2020, giving employers fewer than 100 days to make the necessary changes to comply with the new overtime exemption requirements or reclassify employees as nonexempt.
The FLSA requires employers to pay overtime to employees who work more than 40 hours in a workweek unless they are exempt. To be exempt (and not eligible for overtime), an employee must perform exempt job duties (i.e., executive, administrative, or professional functions) and be paid on a salary basis at or above a minimum salary threshold. Currently, the salary threshold for exempt employees is $455 a week, or $23,660 annually. That threshold was set in 2004.
You may recall that in March 2014, President Barack Obama directed the secretary of labor to update the overtime regulations, and in May 2016, the DOL issued a rule that raised the salary threshold to $47,476 per year, with automatic adjustments every three years. Shortly before the rule was to go into effect, a federal district court in Texas declared it invalid and enjoined, or barred, it from being enforced. The DOL appealed that decision to the U.S. Court of Appeals for the 5th Circuit. The appeal was held in abeyance pending further rulemaking by the DOL on a revised salary threshold.
Changes to the Salary Threshold Rule
That brings us to today. After publishing a Notice of Proposed Rule-making on March 22, 2019, that rescinded the 2016 rule and proposing a new rule, the DOL solicited comments and conducted listening sessions on its proposed rule. According to the department, there was widespread agreement that the salary threshold should be updated in light of wage and salary growth since 2004. The new rule, effective January 1:
- Raises the minimum salary threshold from $455 per week ($23,660 per year) to $684 per week ($35,568 per year);
- Allows employers to count certain nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the new salary threshold;
- Raises the total annual compensation required for employees to meet the “highly compensated employee” exemption (subject to a minimum duties test) from $100,000 to $107,432; and
- Revises special salary levels for workers in U.S. territories and in the motion picture industry.
There are no automatic adjustments to the salary threshold under the new rule. There is a commitment to review and update the salary threshold more frequently in the future, but any change will require notice-and-comment rulemaking. There are also no changes to the duties tests or the salary basis test, which must be satisfied in addition to the salary threshold for employees to be properly classified as exempt.
With the change to the overtime rule taking effect next year, it’s time to audit your job classifications, reviewing each position and applying the duties test and the new salary threshold test to determine its exempt or nonexempt status. Keep in mind that Wisconsin has a more stringent duties test that limits the amount of nonexempt work an employee can perform and still remain exempt to 20 percent (versus the 50 percent rule of thumb under the FLSA). Employees currently classified as exempt who meet the duties test must be paid at least $684 per week ($35,568 annually) effective January 1, 2020, to maintain their exempt status.
You will need to consider whether it makes financial sense to increase the salary level (and/or bonus and incentive payments) for employees who earn less than $684 a week to meet the new threshold or, alternatively, convert them to nonexempt overtime-eligible status. Considerations for reclassifying employees as nonexempt include the number of hours they typically work in a workweek and your ability to manage their hours to reduce potential overtime. It’s also a good time to review your other pay policies and practices to ensure they comply with applicable overtime rules, including the salary basis rules prohibiting improper deductions from pay.
This article, slightly modified to note recent updates, was featured in the November issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.