Department of Labor Unveils Final Overtime Rule

On September 24, 2019, the Department of Labor (DOL) issued its final rule modifying the exemptions to the Fair Labor Standards Act (FLSA or the Act), the federal law that governs wage and hours issues, overtime rules for certain white-collar employees as well as those for highly compensated employees. This marks the first change since the complete overhaul of the overtime wage regulations in 2004.

The 2004 regulations provided that, in general, any employee earning less than $455 per week ($23,660 per year) is a nonexempt employee entitled to overtime pay regardless of whether he or she is paid on an hourly or salary basis. Employees paid above that level have to meet a duties test, discussed below in more detail, in order to be classified as an exempt executive, administrative or professional employee.

Final Overtime Rule Highlights

Effective January 1, 2020, the final overtime rule:

  • Raises the salary threshold to $684 per week or $35,568 per year. This translates to a salary threshold of $1,368 for employees paid on a biweekly basis, $1,482 for employees paid on a semimonthly basis, and $2,964 for employees paid monthly.
  • Raises the total annual compensation requirement for highly compensated employees (HCEs) to $107,432 (up from $100,000 per year). The rule sets the total annual compensation level at the 80th percentile of full-time salaried workers nationally. As part of an exempt HCE’s annual compensation, the employee must receive at least the new standard salary amount of $684 per week on a salary or fee basis.
  • Allows employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level. Employers must pay exempt employees 90% of the standard salary level ($615.60 per week), and if at the end of the 52-week period the salary paid plus the additional payments do not equal the standard salary level for 52 weeks ($35,568), the employer would have one pay period to make up for the shortfall (up to 10% of the standard salary level, $3,556.80).
  • The rule sets the salary threshold at $455 per week in Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands (U.S territories).

The final rule does not make changes to the duties test and it does not include a provision to automatically adjust the salary threshold.

The DOL stated its intent to update the standard salary level and HCE total annual compensation threshold more regularly in the future using the notice and comment rulemaking process.

Employees now covered by the Act must receive overtime pay for hours worked over 40 hours in a workweek at a rate not less than time and one-half of their regular rate of pay. There is no limit in the Act on the number of hours employees aged 16 and older may work in any workweek. The Act does not require overtime pay for work on Saturdays, Sundays, holidays or regular days of rest unless overtime is worked on such days.

A common misconception is the use of the term “exempt”, which can often be confused with “salaried”. When an employee is salaried, it simply means that an employer has chosen to pay that person a fixed amount per week or year. When an employee is exempt, it means that the employee meets a specific definition under the labor laws and is not entitled to overtime and other benefits that apply to non-exempt employees only.

These exemptions, known as white-collar exemptions because they apply to individuals or executives in professional settings, group employees under three categories of exempt job duties: administrative, professional and executive. If an exempt employee does not meet the salary level or basis test, they need to meet the performance of an exempt job duty in order to be considered exempt.

Final Overtime Rule Exemptions

Administrative Exemption

The administrative exemption applies to employees who perform work that keeps the business up and running and who are authorized to make relatively important decisions. To qualify, all of the following requirements must be met:

  • The employee’s primary duties must be the performance of office or nonmanual work directly related to the management or general business operations of the company or its’ clients.
  • The employee must regularly exercise independent judgment on important matters.

Professional Exemption

The learned professional exemption applies to employees who work in professions that typically require an advanced degree (college, CPA, MBA). For the learned professional exemption to apply, all of the following must be true:

  • The employee’s primary duties must relate to work that is largely intellectual and involves the regular use of “discretion and independent judgment”.
  • The employee must work in a field of science or learning.
  • The employee must have acquired his or her knowledge through a prolonged course of specialized intellectual instruction.
  • To be more specific, the DOL drills down into the generalization of work, specialized instruction and discretion/judgment, by stating the employee has the authority to perform at least some of the following tasks:
    • create, change, or deviate from standard policies or practices
    • provide consulting or expert advice to management (law, accounting, engineering)
    • set business goals
    • negotiate and bind the company to matters of importance, and
    • carry out major assignments that have a large impact on the business.

Executive Exemption

The executive exemption is usually reserved for high-level managerial employees. For an employee to qualify, all of the following requirements must be met:

  • The employee’s primary duties must relate to managing the business, or a department within the business.
  • The employee must regularly manage at least two full-time employees, or the equivalent in part-time employees.
  • The employee must have the authority to hire or fire employees, or the employee’s recommendations on hiring, firing, and promotions must carry significant weight.

Impact of the Final Overtime Rule

These rule changes will cause business owners to reevaluate their current staff, employee-by-employee, and assess the amount of overtime that a particular employee works versus the amount that the employee’s salary would need to be increased to meet the new threshold. Businesses can use certain measures and make decisions to place limitations on the amount of overtime it will allow any non-exempt employee to work in order to avoid increased payroll costs but it will have to consider necessity, productivity and forecasted growth of their current businesses. Finally, business owners will have to invest the time need to ensure that employee time and pay is tracked appropriately to ensure these new rules are met come January 1, 2020, to avoid FLSA violations and potential penalties.

reach out to the Employee Benefits Services Team with any questions on the new overtime rule.

Employee Benefits Services

Joseph Fede, CPA, Employee Benefit Plan Services Group |
[email protected]

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