The New Federal Overtime Rule

by Ashley Wong | October 1, 2019

In big news for employers, the U.S. Department of Labor (the “DOL”) announced on September 24, 2019 that it would be releasing its final rule, which sets forth the new thresholds for minimum wage and overtime pay for “white collar” employees. The new rule will take effect on January 1, 2020.

Fair Labor Standards Act

Under the Fair Labor Standards Act (FLSA), covered employers are required to pay employees a minimum wage and overtime pay of 1.5x for hours worked in excess of 40 hours in a week. Some employees, however, are exempt from these minimum wage and overtime pay requirements. This is colloquially known as the “white collar” or “EAP” exemption and applies to employees who are “employed in a bona fide executive, administrative, or professional capacity.” This is the rule that people are referring to when they talk about employees as “exempt” or “non-exempt.”

There are 3 requirements for an employee be “exempt” from the minimum wage and overtime requirements:

The Salary Basis Test: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
The Salary Level Test: The amount of salary paid must meet a minimum specified amount.
The Duties Test: The employee’s job duties must primarily involve executive, administrative, or professional duties, as defined by the regulations.

Additionally, the FLSA has a special exemption for “highly compensated employees” (the “HCE Test”). The HCE test applies only to employees whose primary duty includes performing office or non-manual work. Under the HCE Test, employees who receive at least a specified total annual compensation… are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption.

The New Rule

The new rule increases the threshold for the Salary Level Test for both the “standard salary level” and for “highly compensated employees,” which were last set back in 2004.

On January 1, 2020, the “standard salary level” threshold will increase from the existing $455/week (equivalent to $23,660/year) to the new threshold of $679/week (equivalent to $35,308/year). The threshold for HCE employees will increase from the current $100,000/year to $107,432/year.

The new regulations also allow employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level.

Lastly, the new regulations revise the special salary levels for workers in U.S. territories and the motion picture industry.

Despite urgings from the U.S. Chamber of Commerce, the new rule does not make any changes to Duties Test and does not provide for automatic updates to the salary thresholds.

What does this mean for employers?

With these salary level threshold increases, approximately 1.3 million employees in the U.S. will be newly eligible for overtime pay at their existing salary levels.

Thus, employers should:

Review employee pay data and determine what impact this new rule will have on its employee base and financials;
Based on that information, determine whether it makes more sense to reclassify affected employees as non-exempt and eligible for overtime pay or to raise salaries for those affected employees;
Determine how to communicate any changes to affected employees;
Train any reclassified employees on company overtime policies and method of tracking overtime; and
Notify hiring managers and HR personnel of the new rules.

Note that, in order for an employee to be classified as exempt from the overtime requirements, the employee must meet all three of the tests outlined above, including the Duties Test.

Have questions about overtime pay requirements or the tests for meeting exempt status? Contact Equinox at contact@equinoxbusinesslaw.com