The U.S. Department of Labor on September 24, 2019, issued a final rule setting the minimum salary threshold for employees exempt from minimum wages and overtime under the Fair Labor Standards Act. The new rules will go into effect on January 1, 2020.
Employees exempt from overtime and minimum wages under the so-called “white collar” rules must meet two tests: First, they must earn a minimum guaranteed salary. Second, they must meet the duties test applicable to the executive, administrative, or professional exemption. Since 2004, the salary threshold has been set at $455 per week or $23,600 per year. In 2016, the Obama Administration’s Department of Labor law issued rules updating the salary threshold to $913 per week or $47,476 per year. These rules were challenged in federal court, and a federal judge invalidated the rule changes.
The Trump Administration issued proposed new rules in March 2019. After receiving comments from the public and industry, the Department has now issued a final rule.
The new rules raise the minimum salary threshold to $684 per week or $35,568 per year. As under the 2004 rules, which are currently being enforced, the minimum salary must be guaranteed, meaning that it is not subject to reduction based on productivity or hours worked.
The new rules do not change the duties tests applicable to exempt employees. In order to be exempt from minimum wage and overtime requirements, an employee must not only be paid at least the minimum salary threshold, he or she must also meet the requirements of the executive, administrative, or professional exemption.
Like the current rules, the new final rule keeps the simplified duties test for highly compensated employees (“HCEs”). Under the final rule, the threshold for the simplified duties test rises from $100,000 per year to $107,432 per year. Employees who earn at least the threshold amount need only perform one of the exempt duties under the executive, administrative, or professional exemption to be classified as exempt.
The new rules retain a provision in the Obama-era rules that allowed up to 10% of the guaranteed salary threshold to be met by non-discretionary bonuses, incentives, and commissions. Unlike the Obama-era rules, which required such payments to be made quarterly, the final rules only require that they are paid annually. When employees fall short of the minimum threshold, a catch-up payment may be made by the first pay period in the new year. That catch-up payment counts toward the previous year only, and not the new year for determining whether salary and incentive-based compensation meet the minimum threshold.
In addition to the above changes, other revisions were made those affect workers in U.S. territories and in the motion picture industry. Because the narrow scope of those changes does not impact most of our clients, the changes are not discussed here.
Many employers may find that they are already at or above the current thresholds as a result of efforts made to meet the Obama-era rule requirements prior to its being invalidated. All employers should review their exempt employees’ salary levels to determine if changes are needed to comply with the new threshold. Employers who pay their exempt employees a combination of salary and incentive-based compensation may want to determine whether to count up to 10% of such income toward meeting the new threshold. If so, those employers should determine what changes may be needed to their incentive-based pay structures to meet the non-discretionary requirements and to monitor the need for making catch-up payments. Employers using the HCE exemption should review the salary levels of those employees to determine if adjustments are needed.
Employers that have not done so already would be well-advised to take this opportunity to review the duties of their exempt employees, too. Few exempt employees fail to meet the salary thresholds. Many more fail to meet the duties tests.
Finally, employers should keep an eye on the litigation that invalidated the Obama-era rules. An appeal of the federal district court’s decision was put on hold to allow the Department of Labor to evaluate and issue new rules. Now that the final rule is out, the litigation likely will need to be resolved to clear the path fully for the new rules. However, employers should not wait to begin reviewing the salary levels of their exempt employees and coming up with a plan to comply by January 1, 2020.
Still Have Questions?
Employers that have questions or need assistance should contact their employment law counsel or one of the labor-management relations lawyer at Gignilliat Savitz & Bettis to review and assist with compliance.