Under the Federal Fair Labor Standards Act (FLSA) “white collar” exemption, employees are exempt and not entitled to overtime if:
(1) a “duties” test establishing that the employees are executive, administrative or professional employees as defined by federal rules is met;
(2) employees are paid on a salary or fee basis; and
(3) employees are paid at least a specified threshold amount per week.
Currently, the threshold amount equates to $23,660 per year. As most employers know by now, the federal Department of Labor (DOL) recently raised the threshold amount. The new rate, which goes into effect on January 1, 2020, raises that amount to $684 per week, or $35,568 per year. Previously exempt employees who are paid less than $684 per week will no longer be exempt from overtime, even if they are paid a salary and meet the duties test. The DOL estimates this change will have an impact on approximately 1.3 million workers.
Other significant changes to the rules include:
(1) raising the minimum compensation required to be eligible for the “highly compensated employees” exemption to $107,432 per year; and
(2) allowing employers to count non-discretionary bonuses, incentives and commissions as up to 10% of the $684 per week salary threshold as long as the bonuses are paid at least annually.
While the DOL intends to propose updates to the salary threshold every four years, the updates will not be automatic, but will require notice and public comment periods.
Employers should start preparing now for the January 1, 2020 implementation date. A good first step would be to identify currently exempt employees whose salary is below the threshold amount. Once that is done, consider which employees you want to keep as exempt and adjust the salary accordingly. Now is also be a good time to conduct a comprehensive audit to correct any potential misclassification issues, e.g. whether the position meets the duties test for a white-collar exemption.
As always, employers should check with state and local laws to make sure any changes that might be considered are consistent with those laws.