The U.S. Department of Labor (DOL) has released the finalized rule on overtime exemptions for white-collar workers under the Fair Labor Standards Act. It is expected to expand the pool of nonexempt workers by more than 1 million.
The new rule is scheduled to take effect on January 1, 2020. Affected employers should consider prompt action to reduce the impact to their bottom lines
The new rule
Under the finalized overtime exemptions regulations, an employer generally cannot classify an employee as exempt from overtime obligations unless the employee satisfies three tests:
- Salary basis test. The employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of the work performed.
- Salary level test. The employee is paid at least $684 per week or $35,568 annually.
- Duties test. The employee primarily performs executive, administrative or professional duties.
The DOL’s final rule specifically increased the salary level test (previously $455 per week or $23,00 annually). Therefore, if an employee’s salary exceeds the new level, the employee will be ineligible for overtime if he or she primarily performs executive, administrative or professional duties. If their salary falls below it, the employee is nonexempt, regardless of duties.
Employers can use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level test. If an employee does not earn enough in such bonuses or payments in a given year to remain exempt, the employer can also make a catch-up payment within one pay period of the end of the year. However, the payment will count only toward the prior year’s salary amount.
Highly compensated employees
Neither the salary basis nor the salary level test applies to certain employees (for example, doctors, teachers and lawyers). The new rule provides a more relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $107,432 (including commissions, nondiscretionary bonuses and other nondiscretionary compensation) and at least $684 salary per week.
The final rule sets the total annual compensation threshold at the 80th percentile of weekly earnings of full-time salaried employees nationally.
The DOL opted against automatic adjustments to salary thresholds every three or four years. Instead, the final rule simply indicates the department’s intent to update the earnings thresholds “more regularly in the future,” following the notice-and-comment rulemaking process.
Preparation tips
Employers should begin taking measures to achieve compliance — and minimize the hit to their finances — when the final rule takes effect. Your business may already be well-prepared if you have previously gone through this process. Take care, though, to not rely on past findings as circumstances may have shifted.
A good first step is to check employees’ salary levels against the new thresholds. It may be advisable to give raises to employees who fall just under a threshold and routinely work more than 40 hours per week. Or consider redistributing workloads or scheduled hours to prevent newly nonexempt employees from working overtime.
This also is a good time to review employees’ job duties against the tests for the various exemptions. Check duties on a regular basis, as this is a ripe area of litigation for employees who contend that they deserve overtime despite their job titles. Courts and the DOL agree that actual duties, not job title or even job description, are what matters.
If, according to the final rule, you reclassify currently exempt workers as nonexempt, you must establish procedures for accurately tracking their time to ensure proper overtime compensation. Reclassified employees may require some training on timekeeping procedures.
Plan accordingly
Some employers may find that the new overtime rule substantially increases their compensation costs, including their payroll tax liability.
Contact your trusted advisor to ensure your company is in compliance with the new rule, as well as all payroll tax obligations.
