On September 24, 2019, the U.S. Department of Labor’s Wage and Hour Division announced a new final rule that updates the earnings thresholds necessary to exempt executive, administrative, and professional employees from the Fair Labor Standard Act’s (FLSA) minimum wage and overtime pay requirements. The rule, which reflects the first time that the thresholds have been updated since 2004 – after an unsuccessful attempt in 2016 – will take effect on January 1, 2020.
To qualify for the FLSA’s “white collar” exemption to minimum wage and overtime pay requirements, (1) 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, (2) the salary paid must meet a minimum specified amount (i.e., the standard salary level), and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties. The new rule impacts the second element of this test.
Under the new rule, the standard salary level will be increased from $455 per week to $684 per week (equivalent to $35,568 per year for a full‑year employee). The Wage and Hour Division estimates that the increase will result in 1.2 million currently exempt employees gaining overtime eligibility. Similarly, the total annual compensation level for “highly compensated employees” will be raised from $100,000 to $107,432, which is estimated to impact 101,800 employees.
The rule also introduces to employers the option to use annual nondiscretionary bonuses and incentive payments (e.g., commissions) to satisfy up to ten percent (10%) of the standard salary level. For example, an employer may pay a white collar employee $33,000 in salary with the expectation that the employee’s commissions earnings will be $3,000. Because the difference between the standard salary level and the employee’s salary is $2,568, and ten percent (10%) of the employee’s salary is $3,300, the employee’s commissions may be credited toward satisfying the difference, resulting in the employee’s exempt status. However, if the employee only makes, for example $1,000 in commissions, the employee would not be exempt because the employee would only have earned $34,000 total. To avoid this result, the final rule would allow the employer to provide the employee with a “catch-up” payment within one pay period of the end of the 52‑week period, which would allow the employer to retain the employee’s exemption status.