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Changes to Overtime Exemptions under the Fair Labor Standards Act

In 2015, the U.S. Department of Labor introduced a proposed rule which would, in part, double the salary threshold required under the Fair Labor Standards Act (“FLSA”) to maintain exempt status under the “white-collar” exemption. The rule, once issued, was declared invalid by the United States District Court for the Eastern District of Texas shortly after it took effect.

This month, however, the Department of Labor announced a new final rule, which increases the earnings thresholds for exempt executive, administrative and professional employees (i.e., the “white-collar” exemption) by 50%. The rule will take effect January 1, 2020.

Generally, to qualify for the “white-collar” exemption, an employee:

• must be paid a fixed weekly salary (the “salary basis test”), and
• must primarily perform executive, administrative or professional duties in accordance with the Department of Labor regulations (the “duties test”).

In addition, there is an earnings threshold for the exemption (the “salary level test”). Prior to this new rule, employees had to be paid at least $455 per week ($23,660 annually) to meet the exemption. The new rule will increase the salary threshold so that an employee will have to be paid at least $684 per week ($35,568 annually) to retain exempt status. The Department of Labor estimates that 1.3 million workers will become non-exempt when the proposed rule becomes effective.

The rule makes a few other changes as well: “highly compensated employees” now must be paid at least $107,432 per year, rather than $100,000 per year; and employers may use nondiscretionary bonuses and incentive payments, including commissions, paid at least annually to satisfy up to 10% of the standard salary levels for FLSA exemptions.

Employers should begin preparing for the proposed changes to the FLSA now. Consider taking the following steps in order to conduct an internal “audit” in preparation for the change to the “white-collar” exemption:

• Review payroll records and identify employees classified as exempt and non-exempt.
• Review salary information for exempt employees. Identify employees making at least $23,660 per year but less than $35,308 per year. These are the employees who will be affected by the proposed changes to the FLSA.
• Determine whether a salary increase to $35,508 per year is possible for the employees impacted by the proposed change, or whether the employees will become non-exempt once the final rule becomes effective.
• Analyze the hours worked by those employees who may become non-exempt and determine how many hours on average are worked in excess of 40 each week.
• If these employees frequently work more than 40 hours per week, determine whether it is possible to reallocate or reduce job duties to keep hours worked at 40 hours per week.

These are a few examples of actions employers can take now to plan for the proposed changes to the FLSA. For additional insight on the proposed rule and how it will impact your organization, further information is available on the Department of Labor’s website or feel free to comment below, email me or connect with me on LinkedIn if you have any questions.