Last week the Department of Labor (DOL) announced the much-anticipated final overtime rule that will raise the salary threshold for determining whether a worker may be classified as exempt from the overtime requirements of the Fair Labor Standards Act. Effective January 1, 2020, employees must earn at least $684 per week (equivalent to $35,568 per year) to qualify as exempt from minimum wage and overtime pay requirements. 

To be exempt from overtime under the FLSA, employees must be paid at least the threshold amount and meet certain duties tests. If they earn less than the threshold amount, or do not meet the duties tests, their employer must pay them overtime (not less than 1 ½ times their regular hourly rate) for time worked in excess of 40 hours in a workweek. The new rule raises the salary threshold from the current $455 per week. (The exemption was last increased in 2004.) The new rule may result in the reclassification of more than a million currently exempt workers to nonexempt and pay increases for others above the new threshold to retain exempt status. Employers should note that the rule does not make any changes to the duties tests and, unlike the overtime rule proposed in 2016, it does not include automatic adjustments over time to the exempt salary threshold.

The final rule also raised the total annual compensation requirements for “highly compensated employees” from the currently enforced level of $100,000 per year to $107,432 per year (“highly compensated employees” have altered duties test requirements). Additionally, in an effort to recognize evolving pay practices, the new rule allows employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level.

In response to the new rule, employers should pull data for exempt workers earning below the threshold and begin to think about the practicalities and timing to implement any necessary changes. Employers may also need to weigh the cost of raising employee salaries above the new threshold against the cost of reclassifying employees as nonexempt and paying overtime. To help with that analysis or for more information on the new rule, please contact one of Martin Pringle’s employment lawyers.