After years of uncertainty, the Department of Labor has issued its final overtime rule. The new rule updates the minimum salary required in order for white collar (executive, administrative, or professional) employees to qualify as exempt from overtime compensation under the Fair Labor Standards Act. Employees now must be paid at least $684 per week ($35,568 annually), on a salaried basis (meaning a predetermined, fixed salary not subject to reductions based on the quality or quantity of work performed), in order to be exempt from overtime compensation (in addition to meeting the well-established duties test).

Remind Me, How Did We Get Here?

Back in 2016, the Obama administration updated the salary threshold for the first time in more than a decade. Since 2004, the threshold had been set at $455 per week ($23,660 annually). The 2015 rule increased that threshold to $913 per week ($47,476 annually). But on the eve of the updated rule’s effective date, a federal court stayed the DOL regulation (and later invalidated it) – effectively sending it into oblivion before it was ever in place. Previous newsletters discussed these happenings (and the exemption itself) in more detail here and here. After that, the DOL scrapped the 2016 rule and started from scratch. It formally solicited public feedback in 2017, which started the road to the final rule that was issued last month.

What Does This Mean for Employers?

If employees make less than $684 per week ($35,569 annually), they simply are not eligible for the white collar exemption (even if their job duties would otherwise qualify them) and they must be paid overtime for all time worked in excess of 40 hours in a single workweek. According to the DOL, this change means that an additional 1.3 million workers will now become eligible for overtime pay. The rule is slated to take effect January 1, 2020. Employers should start reviewing the exempt status and salaries of their employees to determine what changes need to be made in order to be in compliance by the new year.

What Else?

It is important to note that the final rule allows employers to count a portion of certain bonuses and commissions toward meeting the salary threshold. Employers may use nondiscretionary bonuses and incentive payments tied to productivity or profitability (including commissions) that are paid at least annually (or more frequently) to satisfy up to 10 percent of the standard salary level. According to the DOL, this change is in recognition of evolving pay practices which increasingly correlate nondiscretionary bonuses and incentive payments with exempt status, and as part of the total compensation package for exempt employees.

The rule additionally permits employers to make a catch-up payment at the end of the year if the employee does not earn enough in nondiscretionary bonuses and incentive payments during the preceding 52 weeks to retain his or her exempt status. The employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level only). If the employer chooses not to make the catch up payment, the employee would be entitled to overtime pay for any overtime hours worked during the previous year.

The rule also updates the total annual compensation requirement for exempt Highly Compensated Employees (HCEs) to $107,432 per year (previously $100,000), when such employees meet a minimal duties test. For HCEs, employers must pay those workers at least the standard salary level of $684 per week, but employers may fulfill the remaining majority of the HCE total annual compensation requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation.

By Rebecca D. Bullard, rbullard@dsda.com