The U.S. Department of Labor (DOL) has released a final rule to increase the minimum salary required to qualify for certain overtime exemptions. The final rule takes effect January 1, 2020. The DOL estimates that the changes will make about 1.2 million workers newly eligible for overtime, unless employers increase their salaries.

The Fair Labor Standards Act (FLSA) requires virtually all employers to pay most employees at least the federal minimum wage for each hour worked, as well as overtime pay for all hours worked in excess of 40 in a workweek. The FLSA allows for exemptions from these overtime and minimum wage requirements for certain “exempt” administrative, professional, and executive employees. To be considered “exempt,” these employees must generally satisfy specific salary and duties tests:

Meet the minimum salary requirement (currently $455 per week);
With very limited exceptions, the employer must pay the employee their full salary in any week they perform work, regardless of the quality or quantity of the work; and the employee’s primary duties must meet certain criteria.

There is also a special exemption for “highly-compensated employees” who are paid a total annual compensation of at least $100,000 and customarily and regularly perform at least one of the exempt duties of an exempt executive, administrative, or professional employee.

Overtime Rule History:

In 2016, the DOL published a final rule that would have raised the minimum salary requirement for the administrative, professional, and executive exemptions to $913 per week, but a court blocked that rule from taking effect.

On March 7, 2019, the DOL released a proposed rule that would have more modestly increased the minimum salary requirement for these exemptions.

DOL Releases Final Rule Effective January 1, 2020:

Minimum Salary Requirement:

Effective January 1, 2020, the minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions will increase from $455 per week to $684 per week (equivalent to $35,568 per year).

This means that in order to qualify for an administrative, professional, and executive exemption from FLSA’s overtime requirements, employees must be paid a weekly salary of at least $684 and continue to satisfy the applicable duties tests. Exempt computer employees may also be paid hourly, if it is at least $27.63 per hour, which doesn’t change under the new rule.

Inclusion of Nondiscretionary Bonuses in Minimum Salary Requirement:

Beginning January 1, 2020, employers will be allowed to use nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least annually.

The final rule permits employers to make a final “catch-up” payment within one pay period after the end of year to bring an employee’s compensation up to the required level. For example, if an employer chooses this option, each pay period, the employer must pay their exempt executive, administrative, or professional employee at least 90 percent of the salary level ($615.60 per week). Then, if at the end of year, the employee’s paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) does not equal at least $35,568, the employer would have one pay period to make up for the shortfall.

Highly Compensated Employee Exemption:

The final rule increases the total annual compensation requirement for the “highly compensated employee” exemption to $107,432 per year (at least $684 must be paid on a weekly salary basis).

For the highly compensated employee exemption, employers are already allowed to include commissions, nondiscretionary bonuses, and other nondiscretionary compensation toward meeting the total annual compensation requirement, but there is no 10 percent cap like the other exemptions. This won’t change under the new rule. Thus, as long as the employer pays the employee at least $684 on a weekly salary basis, the employer will be able to count these other forms of compensation toward meeting the minimum total compensation requirement ($107,432 per year).

No Changes to Duties Tests:

The DOL didn’t make changes to the duties tests.

Future Minimum Salary Increases:

The DOL intends to update the minimum salary requirements more regularly, using the same rulemaking process, which involves publication in the federal register and an opportunity for public comment.

Compliance Recommendations:

Employers should evaluate the potential impact on their business now. This includes identifying those employees who currently earn less than $35,568 annually and are exempt from overtime. If your exempt employees fall below the new salary threshold, you would have two options:

Reclassify the employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek; or raise their salary to meet the new requirement.

Note: Some states have their own salary requirements that already exceed the new federal rule. Some other states may decide to increase their salary thresholds based on the new federal rule. Review both federal and state law to determine whether an employee may be classified as exempt from overtime. If an employee is covered by both the federal and state law but doesn’t meet both sets of tests, consult with counsel to determine how you should classify the employee in that particular situation.