United States: Labor Department Approves A New Final Rule Altering FLSA Exempt Status, Extending Overtime Eligibility

Last Updated: October 1 2019
Article by Kevin E. Miller and Alan L. Rupe

On September 24, 2019, the United States Department of Labor's Wage and Hour Division issued its long awaited Final Rule modifying the regulations contained in 29 C.F.R. Part 541, which pertains to the "white collar" exemptions to the Fair Labor Standards Act (FLSA) for executive, administrative, professional, outside sales, and computer employees. This Final Rule significantly modifies the current legal field pertaining to wage and hours laws in the United States.

In 2016, the Department of Labor (DOL) attempted to significantly increase the minimum salary level required for an employee to be considered exempt from the FLSA's overtime requirements. However, a Texas federal court enjoined the DOL's 2016 rule from going into effect. This new Final Rule arises in response to the litigation which challenged the DOL's earlier 2016 Final Rule. 

Under the new Final Rule, for certain employees to qualify as exempt under the FLSA, the employee must meet two essential requirements: 1) they work in a qualified executive, administrative, or professional capacity and, 2) they are compensated at or above the "standard salary level." The new Final Rule, issued on September 24, adjusts the requirement for the "standard salary level" for an employee to qualify as an exempt employee. Under the previous salary levels established in 2004, and employee made a qualifying salary if the employee was compensated at least $455 per week or $23,660 per year. The new Final Rule raises this minimum threshold requirement to compensation of $684 per week or $35,568 per year for full time employees. The new Final Rule goes into effect on January 1, 2020. 

The new standard salary level applies to the majority of American employees. The DOL maintains a special salary level for employees in American Samoa, Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of Northern Mariana Islands. For American Samoa, the standard salary level remains unchanged at $380 per week or $19,760 per year. For the other American territories, the DOL has set the salary level for exempt employees at $455 per week or $23,660 per year.

Employees in the motion picture producing industry are not subject to the standard salary level, but are instead subject to a "base rate" model. This test for FLSA overtime exemption applies to certain employees who work in the motion picture producing industry who work less than a full work week and are paid on per day basis. Under the new Final Rule, an employee receives sufficient pay on a per day basis to qualify as exempt if their pay for working six days per week meets or exceeds $1,036. This increase from the previous level is proportionate to the increase in the standard salary level.

A second class of employees—"highly compensated employees"—are also affected by the DOL's changes. Under previous regulations, an employee qualified as a highly compensated employee if their annual salary was $100,000 or greater. The DOL has increased the salary threshold for an employee to be considered a highly compensated employees to $107,432 per year.

To mitigate the effect of these increases on employers, the DOL also approved a plan to allow for non-discretionary bonuses and incentive programs to factor into the satisfaction of the standard salary level in consideration of whether an employee is exempt from the FLSA's overtime requirements. Employers may satisfy up to 10% of the standard salary level through non-discretionary bonuses and incentives, which includes commissions, as long as such bonuses and incentives are paid at least annually. This means non-discretionary bonuses may account for up to $3,556 of an employees salary when determining if they are exempt from the overtime requirements of the FLSA.

An employee who would be considered exempt had they earned a qualifying bonus, but failed to earn the bonus or earn a sufficient bonus, does not automatically become a non-exempt employee for the previous year. The employer may make a one time "catch-up" payment for the previous year to satisfy the standard salary level. This payment will only count as a wage payment to the employee for the previous year and cannot be considered for satisfying the standard salary level for the year in which the payment is made.

Through this new Final Rule, the DOL indicated in interest in further monitoring the salary level for highly compensated employees in the coming years. The DOL expects it will continue to seek increases to the salary requirement for potentially exempt employees through the Administrative Procedures Act's public notice and comment provisions. Employers will need to be alert to additional changes to these regulations in the near future.

Absent litigation challenging this Final Rule, it will become effective for all employers governed by the FLSA on January 1, 2020. The DOL's new salary standards only effect the salary standards under Federal Law. State law regarding compensation of employees is not directly affected by these changes. Complying with the requirements of both the new regulations regarding the FLSA and individual state law on overtime compensation is necessary to avoid potentially costly litigation. Lewis Brisbois can provide advising and counseling services to employers of all sizes to ensure the employer is in compliance with this new Final Rule and state specific overtime compensation laws.

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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