A. The Department of Labor Issued Its Final Rule on September 24, 2019.
The Department of Labor (“Department”) issued a final rule revising the regulations interpreting the Fair Labor Standards Act (“FLSA” or “Act”) on September 24, 2019. They set new and higher thresholds for both the minimum weekly equivalent salary level and the total minimum annual compensation level for “highly compensated employees” (“HCE’s”). These new salary and annual compensation minimums affect most employees eligible for the White Collar exemptions from the Act’s minimum wage and overtime requirements. Generally, employees eligible for these exemptions perform any one or more of executive, administrative, professional, or outside sales functions. Since the outside sales exemption and professional exemptions for school teachers, medical doctors in internships and residencies, and lawyers practicing law lack any minimum salary or minimum annual compensation level, the new final rule has no effect on workers in those exempt job classifications. In addition, this rule makes no changes to the minimum hourly rate of $27.63 for exempt employees paid on the basis of an hourly wage rate in certain computer related jobs. <https://www.dol.gov/whd/overtime/fs17a_overview.htm ; https://www.dol.gov/whd/overtime/fs17d_professional.htm > The new rule, however, sets a higher weekly equivalent minimum salary for exempt employees in certain computer related jobs compensated on a salaried basis.
The Department initially announced a notice of proposed rulemaking to update the same minimum weekly equivalent salary level and the minimum annual compensation level for HCE’s in March 2019. <http://theblogforbusinesslaw.com/department-of-labor-increases-the-minimum-salary-to-exempt-white-collar-workers-from-overtime-pay/ > The final rule slightly increases the minimum weekly equivalent salary level from $679 ($35,308 annually) to $684 ($35,568). It, however, lowered the minimum annual compensation level for HCE’s from the proposed rule’s $147,414 to $107,432. Currently, the existing regulations set the minimum weekly equivalent salary at $455 ($23,660 annually) and the minimum annual compensation level for HCE’s at $100,000. The Department last updated these threshold amounts in 2004. The new thresholds take effect on January 1, 2020.
B. The Final Rule Allows Employers to Include Nondiscretionary Bonuses and Incentive Payments to Satisfy a Maximum of Ten Percent of the Minimum Equivalent Weekly Salary.
The final rule, furthermore, authorizes employers who pay nondiscretionary bonuses or incentive payments (including commissions) to exempt executive, administrative, professional, or computer employees to count such payments toward up to ten percent of the annualized minimum weekly salary level equivalent. To do so, employers must make such payments on an annual or more often basis. If an employee, furthermore, earns less than enough in nondiscretionary bonus or incentive payments in a specific year (any period of 52 consecutive weeks) to keep her or his exempt status, the employer may make a catch-up payment by no later than one pay period after the end of the 52-week period to preserve the employee’s exemptions for the year. If an employer makes such a catch-up payment, then it counts only toward the prior year’s salary amount, but not toward the annual salary amount for the year in which the employer pays it. If an employee loses her or his exempt status because his annualized bonuses or incentive payments plus salary payments equal less than $35,308, then the employer must pay overtime pay for any hours worked during the previous 52-week period.
The final rule, however, leaves the current rules in effect for HCE’s with respect to counting nondiscretionary bonuses and incentive pay toward the minimum weekly salary equivalent. In other words, employers must pay HCE’s a minimum weekly salary equivalent of $684. The remainder of the employer’s compensation of such employees may include commissions, nondiscretionary bonuses, and other nondiscretionary pay. The final rule omitted any offset of the minimum weekly salary equivalent for HCE’s, because employers may already pay more than half of such employees’ pay in the form of commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation. <https://www.dol.gov/whd/overtime2019/overtime_FAQ.htm#6 >
C. The Department Estimates that the Final Rule Will Directly Impact the Wages of about 1.4 Million Workers.
The Department has estimated the new final rule’s economic impact. It expects about 1.3 million exempt workers currently paid a minimum weekly salary equivalent of $455 will either become eligible for overtime pay or have their weekly salary equivalent raised to $684. In addition, the Department anticipates that about 101,800 current HCE’s earning annual compensation levels of $100,000 will either become eligible for overtime pay or have their annual compensation levels increased to $107,432, at least.
D. How to Prepare for the Final Rule’s Implementation.
The final rule takes effect on January 1, 2020. In the meantime, employers should take the following steps to get ready:
1. Review payroll records of salaried executive, administrative, professional, and computer employees who the employer compensates by annual salaries of less than $35,568 only.
2. Review payroll records of salaried executive, administrative, professional, and computer employees who earn annual salaries of, at least, $32,011 and also receive non-discretionary bonuses, commissions, or other incentive payment that annually total, at least, $3,556.80.
3. Review the job duties of such employees and confirm that they spend more than one-half of their working time doing exempt duties.
4. Decide whether:
- a. to pay these employees overtime pay for all hours worked beyond 40 in the same workweek,
- b. to increase their annual salaries to, at least, $35,568 for employees paid by their salary only,
- c. to raise their annual salaries to, at least, $32,011 if they also earn non-discretionary bonuses, commissions, or other incentive payments that annually total, at least, $3,556.80,
- d. to reassign some of their duties to other workers to eliminate the need for them to work more than 40 hours in the same workweek, or
- e. to limit these employees to a workweek of no more than 40 hours.
5. For HCE’s performing office or non-manual work, currently earning an annual salary of at least $35,568 and other non-discretionary compensation, such as commissions and bonuses, that produce total annual compensation of, at least $107,432, and customarily doing, at least, one of the bona fide exempt duties of an executive, administrative, or professional employee, employers must:
- a. Analyze the HCE’s job duties to determine whether her or his duties satisfy the eligibility requirements for the executive, administrative, or professional overtime exemption.
- b. If so, the employer should reclassify the employee accordingly and raise her or his annual salary to at least $32, 011.
- c. Otherwise, the employer has three options:
i. raise the employee’s annual salary to $35,568 if her or his total annual compensation will total at least $107, 432 to maintain her or his exempt status as an HCE;
ii. change her or his duties to allow the employee to meet all the requirements for one of the White Collar exemptions, or
iii. reclassify the employee to non-exempt status and pay overtime pay to her or him.
Finally, employers also must pay attention to state overtime laws. The Missouri law specifically includes a provision that requires its interpretation consistently with the FLSA. On the other hand, Illinois law requires the interpretation of the state law’s White Collar overtime exemptions consistently with the FLSA’s similar exemptions generally, but it lacks any provision substantially the same as the overtime exemption for HCE’s. Consequently, Illinois employers must follow the more restrictive state law, and they have no overtime exemption for HCE’s.