This week the Federal Department of Labor announced its long-awaited final overtime rule, which will go into effect on January 1, 2020. The final rule raises the standard salary threshold from the currently enforced level of $455 per week up to the new level of $684 per week (which is the equivalent of $35,568 per year for a full-time worker) in order to be considered exempt from minimum wage and overtime under the Fair Labor Standards Act (“FLSA”). The new thresholds account for the growth in employee earnings since the rule was last updated in 2004.
The final overtime rule does not change any of the “duties tests” that must be met (in addition to the salary threshold and being paid on a salary basis) to claim Executive, Administrative, or Professional exemptions under the FLSA. Moreover, the final rule does not include any automatic updates, which had been proposed under prior versions of the rule during the Obama administration.
The final rule:
• Raises the “standard salary level” from $455 per week to $684 per week ($35,568 per year for a full-time employee);
• Raises the total annual compensation requirement for highly compensated employees (HCE) from the current level of $100,000 to a new level of $107,432 per year;
• Now allows employers to use non-discretionary bonuses and incentive payments (including commissions) paid at least on an annual basis to satisfy up to 10% of the standard salary level; and
• Also revises the special salary levels for workers in U.S. territories and the motion picture industry.
The Department of Labor estimates than an additional 1.3 million American workers will now be made eligible for overtime pay. The Department also estimates that an additional 101,800 workers will be entitled to overtime pay as a result of the increase to the HCE compensation level.
In the past, there have been court challenges that blocked a prior version of the overtime rule from going into effect. In 2016, a federal district court judge in Texas ruled that the Department of Labor had exceeded its authority in issuing the overtime regulation because the actual text of the FLSA does not mention a salary threshold. The court then granted summary judgment against the Department. The Department of Labor appealed to the Fifth Circuit, which granted a stay until the new regulation was issued. Now that the new final rule has been announced, there may be further court action to resolve whether the DOL has authority to set a salary threshold in the first place.
Employer Takeaway:
With the potential for further court challenges, the final rule may face a delay in its implementation. However, in light of the final rule’s impending effective day, employers are well-advised to consider potential increases to exempt employees’ salaries if necessary (up to a minimum of $684 per week), in order to preserve those employees’ status as truly exempt.
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