United States: DOL Reveals Long-Awaited Final Rule Governing Overtime Exemptions

Last Updated: September 30 2019
Article by Salvador P. Simao, David S. Kim and Priya Amin

Today, the U.S. Department of Labor (“DOL”) announced its Final Rule updating the salary thresholds for the executive, administrative, and professional exemptions, as well as the highly compensated employees exemption, under the Fair Labor Standards Act (“FLSA”).

Background: Originally in 2016, during the Obama administration, the DOL sought to increase the salary threshold to $913 per week ($47,476 annually) for white collar exemptions and $134,004 annually for highly compensated employees. The 2016 Rule called for an automatic update of the salary threshold every three years and permitted the use of nondiscretionary bonuses and incentive payments to satisfy 10 percent of the salary requirement. However, the DOL required that the bonuses and incentive payments be tied to productivity and profitability and that they be made on a quarterly or more frequent basis. This rule faced a tremendous amount of backlash and was ultimately blocked by a federal judge before it could be implemented. In its new Final Rule, the DOL formally rescinds the 2016 Rule.

Summary of New Rule: Effective January 1, 2020, the new regulations increase the salary threshold for white collar exemptions from $455 per week ($23,660 annually) to $684 per week ($35,568 annually) and for highly compensated employees from $100,000 annually to $107,432 annually. The Final Rule allows employers to use nondiscretionary bonuses and incentive payments, paid at least annually, to satisfy up to 10 percent of the salary threshold. Employers are permitted to make a “catch up” payment if an employee does not earn enough nondiscretionary bonuses or incentive payments in a given year, as long as the payment is made within one payday of the end of the 52-week period. Lastly, the DOL forgoes any automatic updates to the salary threshold and instead reiterates its determination to update the earnings thresholds more regularly through notice-and-comment rulemaking.

Employers’ Bottom Line: Although the new Final Rule is likely to be less controversial than the 2016 Obama-era Rule, employers should still be cautious in taking appropriate steps to ensure compliance with these new thresholds going forward. This includes conducting an audit of employees affected by the increase in the salary basis test to determine whether to re-classify employees, increase salaries or consider alternative compensation methods.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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