U.S. Department of Labor Issues Final Overtime Rule

U.S. Department of Labor Issues Final Overtime Rule



The Fair Labor Standards Act (FLSA) requires that, among other things, non-exempt employees be paid overtime at a rate of one and one-half times their regular rate of pay for hours worked above 40 hours worked per week. So-called “white collar” employees (i.e., professional, administrative and executive employees) and “highly compensated” employees, as defined in the FLSA, are exempt from this rule.

The U.S. Department of Labor (“the DOL”) recently issued its final rule amending the regulations governing employers’ overtime obligations. The amended regulations, which become effective on January 1, 2020, increase the minimum salary and total compensation that an employee must earn to meet the “white collar” and “highly compensated” exemption rules. As a result, these changes expand the number of “white collar” and “highly compensated” employees who will be eligible to receive overtime compensation in January by an estimated 1.3 million additional employees. This memorandum provides an overview of those portions of the new rule that are likely to impact your workforce.

White Collar Exemption

To satisfy the “white collar” exemption, an employee must meet the following three criteria: (1) the employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“the salary basis test”); (2) the employee’s salary meets a minimum specified amount (“the salary level test”); and (3) the employee’s job duties primarily involve executive, administrative or professional duties as defined by the regulations (“the duties test”). The amended regulations only affect the “salary level test,” leaving the other tests in place, and do so by increasing the required minimum salary level from at least $455 per week or $23,660 annually, to $684 per week or $35,568 annually. A “white collar” employee may be qualified for the exemption if the employee does not work a full year if the employee receives a pro rata portion of the minimum amount of the salary level.

In recognition of evolving pay practices, the DOL’s final rule also permits employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary level test. To be credited, however, employers must make these nondiscretionary bonus and incentive payments at least on an annual or more frequent basis.

Pursuant to the final rule, employers are also permitted to make a one time “catch-up” payment to bring an employee’s total compensation for the year up to the required level to be exempt. The “catch-up” payment itself may constitute up to 10% of the total standard salary level, and must be made within one pay period following the end of the preceding 52-week period.

Highly Compensated Employee Exemption

To be exempt as a highly compensated employee, an employee must satisfy the following three criteria: (1) the employee’s total compensation meets a minimum specified amount; (2) the employee’s primary duty includes performing office or non-manual work; and (3) the employee must customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee. The amendments change the first criterion by increasing the “total annual compensation” requirement from a minimum of $100,000 to a minimum of $107,432. In addition, to qualify as a highly compensated employee, an employee must also receive at least $684 per week (up from $455 per week) on a salary or fee basis, exclusive of nondiscretionary bonuses and incentive payments. Employers may, however, continue using nondiscretionary bonuses and incentive payments to calculate the total annual compensation at the new threshold of $107,432.

No Automatic Salary Level Increases

When the DOL attempted to make a similar change to the regulations involving “white collar” and “highly compensated” employees in 2016, there was a mechanism to automatically increase the salary thresholds every three years. However, the final rule issued on September 24, 2019 does not contain this mechanism. Instead, the DOL merely reaffirmed its intention to more regularly increase the salary thresholds in the future.

As always, we will keep you informed of any future developments in this area. If you have any questions regarding the new rule or exempt employees, please contact Alyson Mathews or one of our other attorneys at 631-694-2300.


© Lamb & Barnosky, LLP 2019