On September 24, 2019, the U.S. Department of Labor (DOL) announced a new final rule – salary limits for overtime exemptions – that updates the salary thresholds that some individuals must meet in order to qualify for a minimum wage and overtime exemption under the federal Fair Labor Standards Act (FLSA).
The final rule becomes effective on January 1, 2020. and will allow employers to use non discretionary bonuses to satisfy up to 10% of an employee’s salary level.
The DOL estimates that the new rule will enable an additional 1.3 million employees to qualify for overtime pay.
These new requirements will have a major impact on employers, since it will require them to review employees’ exempt status, update overtime policies, notify employees of changes and adjust payroll systems – all of which could result in higher administrative and payroll expenses.
What’s Included in the Salary Limits for Overtime Exemption Rule?
For the Salary Limits for Overtime Exemption rule, the FLSA requires that eligible employees be paid time and a half for all hours worked over 40 in a work week.
However, overtime rules do not apply to certain “white collar” workers, like executive, administrative, professional, outside sales, computer employees and some highly compensated individuals – these are known as the white collar exemptions.
To qualify for a white collar exemption, an individual must pass a salary test, a salary level test and a duties test.
The DOL decided to revise the “white collar exemptions” provided by the FLSA due to concerns that they were outdated, since the salary thresholds have only changed twice in the past 40 years.
Currently, the salary threshold (salary level test) for overtime pay eligibility under the white collar exemptions is $23,660 a year or $455 a week.
The new rule increases the salary threshold to $35,568 per year or $684 per week.
This figure is over $12,000 lower than the salary threshold in the 2016 final overtime rule that was struck down by a federal court, but slightly higher than the level in the 2019 proposed rule.
The new rule also increases the $100,000 salary level for highly compensated individuals to $107,432 per year.
Who is Covered Under the FLSA?
FLSA coverage is very broad – meaning many employers and most employees are subject to the FLSA. Employees may be covered by the FLSA in two ways: through “enterprise coverage” or through “individual coverage.”
- Enterprise coverage – applies to employees who work for businesses that have at least two employees and:
- Engage in commerce with at least $500,000 in gross annual business; or
- Is a hospital, resident care facility, school or public agency.
- Individual coverage – applies to employees who are involved in interstate commerce, including the production of goods for commerce. Domestic service workers (e.g., housekeepers, full-time babysitters and cooks) may also be covered depending on their annual wages and hours worked. Employees may be covered even if the employer is not a covered enterprise.
Why Does The New Salary Limits Rule Matter?
The DOL estimates the new rule will extend overtime protections to more than 1.3 million workers who are currently exempt under the white collar exemption rules.
The DOL estimates that average annualized direct employer costs will total approximately $173.3 million per year over the first 10 years, assuming a 7% discount rate. The estimate accounts for regulatory familiarization, adjustment and managerial costs.
Currently, salaried workers who fall above the $23,660 salary threshold and who are given some managerial tasks are considered “exempt” from overtime pay.
Many argue that this exemption has allowed millions of workers to be misclassified as managers, even if the majority of their work is not spent on managerial tasks.
Employer Action Steps
To prepare for the final rule’s Jan. 1, 2020 effective date, employers should:
- Download our HR Toolkit: Overtime Rule for additional information, resources, and communication templates.
- Determine which currently exempt employees have salaries below the new threshold.
- Decide whether to increase salaries for these individuals or reclassify them as nonexempt employees.
Have questions? Fill out the form below to request our HR Toolkit: Overtime Rule.
HR Toolkit: Overtime Rule
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Components of this article were adapted from Zywave. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.