What Employers Need to Know About New Overtime Exemption Regulations

Last week, the U.S. Department of Labor issued its Final Rule regarding the salary thresholds that apply to certain exempt white-collar employees. The new salary thresholds will take effect on January 1. The DOL received more than 116,000 comments about its proposed regulations, which were issued in March. However, many of the comments were “form” comments with the same content.

KEY PROVISIONS
Standard salary levels (Executive, Administrative, and some Professional exemptions)
The salary threshold levels for these exemptions were set at the 20th percentile of earnings of full-time salaried workers in the lowest-wage region (the South) or in the retail industry nationally.

For workers to be exempt from the overtime requirements of the Fair Labor Standards Act based on the executive, administrative, or some professional exemptions, they must be paid at least the amounts indicated below as of January 1:

• $684 per week, or $35,568 per year. (The current threshold level is $455 per week, or $23,660 per year.)

Because the DOL used the most recent salary data available at the time it drafted the Final Rule (from June 2019), there will be no updating in January 2020 to adjust for inflation.

Employers may count non-discretionary bonuses, incentives, and commissions toward up to 10 percent of the standard salary level as long as the employer pays those amounts at least annually.

Highly compensated employees
The total annual compensation level for the “highly compensated employee” exemption will be set at the 80th percentile of earnings of full-time salaried workers nationally. Under the proposed rule, the exemption would have been set at the 90th percentile.
For workers to be exempt from the FLSA overtime requirements based on their status as highly compensated employees, they must be paid at least the amounts indicated below as of January 1:

• $107,432 per year, of which at least $684 per week must be paid on a salary or fee basis. The remaining minimum annual compensation may include commissions, non-discretionary bonuses and other non-discretionary compensation. (The current threshold for highly compensated employees is $100,000 a year.)

Special threshold rates
The final regulations also include special rates that apply in certain circumstances:

• $455 per week for workers in Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.
• $380 per week for workers in American Samoa.
• $1043 per week for workers in the motion picture industry.

The final regulations do not make any changes to the “duties tests,” nor do they include any provision for automatic “adjustment” of the salary thresholds in the future. Regarding the latter, the DOL has said that it will periodically revisit the minimum salary and compensation levels through future notice-and-comment rulemaking.

According to DOL estimates, 1.2 million employees who are currently exempt under the executive, administrative, and professional exemptions will, without some intervening action by their employers, become eligible in 2020 for overtime under these new salary levels. Absent employer action, approximately 101,800 employees who are currently exempt as highly compensated employees are expected to become eligible for overtime in 2020.

ANALYSIS
The most significant differences between the new final regulations and the version issued in 2016 by the Obama Administration (which was invalidated by a court ruling), are that the current increases are more modest, and that there is no mechanism included for automatic adjustments in the future.

Some employee advocacy groups have publicly said that they plan to challenge the new regulations in the courts. Even if their challenges are successful, the effect would almost surely be to leave in place the current (significantly lower) threshold levels, which were set in 2004. Thus, the logic behind a legal challenge by worker advocates is not readily apparent.

Assuming, as we must, that the new regulations will take effect on January 1, employers will need to quickly reassess the exempt classifications of employees who are paid less than the levels mandated in the new regulations. Employers will have to evaluate whether to increase the salaries of those employees to retain the exempt classification, or whether to reclassify the employees as non-exempt (eligible for overtime).
While that reassessment is taking place, it is also an excellent time for employers to evaluate compliance with the job duties requirements applicable to the white-collar exemptions. Although the new regulations did not change the “duties tests,” job duties nonetheless remain requirements that must be satisfied in addition to the salary and compensation requirements.

Constangy, Brooks, Smith & Prophete, LLP
Constangy, Brooks, Smith & Prophete offers a wider lens on workplace law. We have counseled employers exclusively since 1946. With offices in 15 states, we are one of the largest labor and employment law practices in the U.S. Constangy has been named as a top firm for women and minorities by organizations including Law360, the National Law Journal and Vault.com. Many of our more than 190 attorneys have been recognized by leading authorities such as Chambers & Partners, Best Lawyers in America® and Martindale Hubbell. Find out more about us online at www.constangy.com or follow us on Twitter @ConstangyLaw. 

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