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New Overtime Rule Announced by the Department of Labor

The Department of Labor (DOL) announced its long-awaited Final Rule updating the salary thresholds for the executive, administrative, and professional exemptions as well as the highly compensated employees exemption under the Fair Labor Standards Act (FLSA). The rule, which will expand overtime pay obligations to an estimated 1.3 million additional workers, will take effect on January 1, 2020.

What do you need to know?

In a nutshell:

  • The minimum salary threshold will be $684 per week, annualized to $35,568 per year.
    • The rule provides for one threshold regardless of exemption, industry, or locality, subject to a few exceptions that already existed.
    • Employers will be able to credit certain non-discretionary payments in limited ways.
  • The highly compensated employee exemption’s additional total annual compensation requirement will be set at $107,432 per year.
  • No changes will be made to the duties tests – the crux of the relevant exemptions.
    • The changes are limited to the executive, administrative, professional, and highly compensated employee exemptions.
    • No change has been made to the various other exemptions (for example, outside sales) that do not specifically include a salary requirement even if the employee happens to earn a salary.
  • There will be no “automatic” updates, or even a formal schedule of future adjustments to these figures.
    • However, you can expect that the salary threshold will be assessed more frequently than it has been in the past, but hopefully not so often that it essentially drives the market.

Under the FLSA, overtime compensation is based on the employee’s regular rate of pay, which is a legal term of art and is not necessarily equal to the employee’s base hourly rate of pay if the employee receives certain types of additional compensation beyond the base hourly wage. Under the current regulations, employers may be discouraged from offering forms of bonus pay that must be included in the regular rate when calculating overtime, as well as certain “perks” which must also arguably be included in the regular rate.

Background

Back in 2016, during the Obama administration, the DOL sought to increase the salary threshold to $913 a week, or $47,476 annually for white collar exemptions and $134,4004 annually for highly compensated employees. The 2016 proposed Rule called for an automatic update of the salary threshold every three years. This rule faced a tremendous amount of backlash and was ultimately blocked by a federal judge before it could be implemented. In its new Final Rule, the DOL formally rescinds the 2016 Rule.

Summary of the New Rule

Once the new Rule goes into effect on January 1, 2020, the new regulations will increase the salary threshold for white collar exemptions from $455 per week ($23,660 annually) to $684 per week ($35,568 annually) and for highly compensated employees from $100,000 annually to $107,432 annually. The Final Rule allows employers to use nondiscretionary bonuses and incentive payments, paid at least annually, to satisfy up to 10% of the salary threshold. Employers are permitted to make a “catch up” payment if an employee does not earn enough nondiscretionary bonuses or incentive payments in a given year, as long as the payment is made within one payday of the end of the 52-week period. The DOL also forgoes any automatic updates to the salary threshold and instead reiterates its determination to update the earnings thresholds more regularly through notice-and-comment rulemaking. Lastly, the DOL is not making any changes to the standard or HCE duties test.

Not every employee is affected by this regulatory change. Obviously, non-exempt workers (whether salaried or paid hourly) are included, but so are other employees. Teachers, for example, are specifically exempt under the “professional” exemption provided in Section 13(a)(1) of the FLSA, but are not subject to the “salary basis” or minimum salary requirements that apply to most other professional employees. The same exemption is true of the following:

  • Attorneys authorized to practice law, and who are actually practicing law;
  • Salespeople falling within the “outside salesman” exemption;
  • Employees authorized to practice medicine or any of its branches who are actually engaged in the relevant practice;
  • Employees holding the degree required to practice medicine who are working in a medical internship or residency; and
  • Employees whose work meets the computer-employee exemption requirements who are paid on an hourly basis at a rate of at least $27.63.  This category’s hourly rate isn’t changing in the proposed regulations. If you do the math, computer professionals under this exemption already would make well over $50,000.

What should employers do?

So what does this mean for employers trying to figure out how to deal with the new rules? We at Poms Risk Services and Poms Connects recommend that employers take the following steps:

1. Be prepared for the unexpected. 

2. Start your compliance planning now. Employers need to start thinking now about how they will deal with the final rules once they are published.

  • In many cases, this may mean re-classifying employees as non-exempt. While it may offer the promise of additional overtime pay for some, this change may not be popular with all employees. Many exempt employees like being treated as exempt, both because of the status they feel it conveys and because it offers a level of flexibility in their hours that non-exempt employees may not enjoy. Determining how your workforce is likely to react to these changes and figuring out how best to temper or deal with those reactions may be a significant undertaking.
  • In other cases, employers may elect to increase salary levels to meet the newly-established minimum: $684 per week, annualized to $35,568 per year. While straightforward in individual cases, we've talked to many clients who are struggling with how to accomplish this across an organization without either blowing away the compensation budget or creating severe salary compression at the lower levels. We've found that this is a particular concern for at least certain colleges and universities and other nonprofits, many of which have exempt administrators with relatively low salaries. While reclassifying some of these employees as non-exempt may be an option, others keep irregular hours or work significant overtime during at least certain portions of the year (e.g., around sports and recruiting seasons) that make reclassification a difficult proposition. While smaller employers may be able to make these adjustments relatively quickly, larger and less flexible organizations may need significant lead time to decide how to deal with these issues.

3. Planning is the KEY.  Sure, this is redundant, but the need for planning cannot be overstated.  There are many details you should take the opportunity to review in your planning:

  • Review current job descriptions to ensure they are up-to-date and accurately reflect the duties performed by employees.
  • Review, but don’t make changes to, positions that are currently classified as "exempt.”
  • Review current collective bargaining agreements, if applicable, for conditions that would change pay or benefits. Employers should be aware that employees reclassified as nonexempt under updated regulations may become part of the bargaining unit.
  • Evaluate compensation and total rewards options if it appears your organization may need to reclassify employees from exempt to nonexempt status.

4. Use the new rules as an opportunity to clean up potential problems. Part of planning to comply with the new rules should be ensuring that you are in compliance with the current regulations. Even though the final rules didn’t change much more than the minimum salary for exempt employees, it is a fair bet that they will prompt a spike in litigation if only because they draw attention to wage and hour issues. Smart employers will stay ahead of that curve by making sure that their existing policies and practices are in compliance. The upcoming changes may also give employers something of a window in which to make changes to reduce compliance risk without obviously signaling that there is a current problem.

5. Finally, the new exemption rules may prompt some employers to look at other actions such as reductions in force, reorganization and consolidation of positions, or outsourcing certain functions to vendors. Again, any of these changes may require significant lead time to implement.

Whatever an employer's response to the new rules, advance planning will be key.

Non-Discretionary Bonuses May Be Included

Under the new FLSA rule, employers will be able to count certain bonuses and incentive compensation toward meeting 10% of the minimum salary thresholds for exempt managerial, administrative, and professional employees.  More specifically, employers may count:

  • non-discretionary bonuses,
  • incentives, and
  • commissions that are paid annually or more frequently. 

An employer may designate and utilize any 52-week period it chooses for this purpose (e.g. calendar year, fiscal year, anniversary year).  If, by the last pay period of the 52-week period, the employee’s total compensation (salary plus non-discretionary bonuses, incentive compensation, and commissions) is less than $35,568, the employer may make one final payment to meet this threshold no later than the next pay period following the end of the year.  Importantly, this payment may only be counted toward the prior year’s threshold and not also the current year’s threshold.  If an employer fails to make this catch-up payment, the overtime exemption will be lost for that 52-week period.

For the highly compensated employee exemption, the rule is similar.  These employees must be paid total annual compensation of at least $107,432, at least $35,568 of which must be paid on a salary basis (i.e. a predetermined, guaranteed amount each pay period that is not based on production).  Employers may count commissions, non-discretionary bonuses, and other non-discretionary compensation toward meeting the $107,432 annual threshold.  [Employers may not count board, lodging, or other facilities, and/or fringe benefits.]  If, by the end of the 52-week period, the employee’s total annual compensation is not at least $107,432, the employer may make one final payment to the employee to meet this threshold within one month after the end of the 52-week period.  If the employer fails to make such a payment, the highly compensated employee exemption will be lost.

Be Mindful of State Laws

Employers should also be mindful that state laws are often more stringent than the federal law. Regardless of what the final DOL rule may include, employers also must consider how the new rule interacts with the corresponding exemptions under the myriad of state laws. Some states do not have overtime laws; others incorporate the FLSA as it stands; others incorporate the FLSA’s overtime provisions, but with higher salary requirements; and others have their own exemptions and salary levels without reference to the FLSA. For example:

  • New York - In December 2016 New York raised the exemption levels for the state on a tiered basis according to geographic location. All areas of New York are currently subject to high salary exemption levels (e.g., the salary exemption level for update New York employee raised to $43,290/year on December 31, 2018).
  • California - To qualify as an exempt employee, the worker must be paid a fixed salary (rather than an hourly wage) equal to at least twice the state minimum wage.  Effective January 1, 2020, this is an annualized salary of at least $54,080 for workers at Employers with 26 or more employees, or $49,920 for workers at Employers with 25 or fewer employees.
  • Alaska - Alaska requires that exempt employees be paid a minimum of two times the state minimum wage for the first 40 hours worked in a week.
  • Connecticut - The employee must be compensated on a salary or fee basis that excludes boarding, lodging and other facilities.
  • Oregon - Oregon’s exempt salary threshold is calculated by taking the applicable minimum wage and multiplying it by 2080 hours per year. Note that within certain counties, specific areas may have an urban or a non-urban minimum wage.

Be certain that you understand the Salary Threshold and other applicable overtime rules in your state or local jurisdiction.

Frequently asked questions can be found here.

As always, Poms Risk Services is here to assist you. Whether you are looking for additional resources or have questions, use our “Ask Poms” HR Hotline on the Poms Connects site, call us at (505) 797-1354, or email us at info@pomsconnects.com