On September 24th, 2019, the US Department of Labor (DOL) announced its final rule on the highly talked about new salary threshold for overtime exemption. The final overtime rule states that there will be an increase in the threshold required for employees to qualify as exempt under the Fair Labor Standards Act (FLSA) minimum wage and overtime requirements. The minimum salary level required for an employee to be considered exempt will be $684 per week, or the equivalent to $35,568 per year, and will take effect on January 1st, 2020.
Changes in salary thresholds for overtime exemptions have been in discussions since the Obama administration proposed an increase to $47,476 ($913 per week) back in 2016. This rule drew a lot of opposition from employer groups that argued that while a change is necessary, this proposed new minimum was unreasonable. While that didn’t take effect due to a federal court ruling, this new amendment is not likely to meet the same fate. The threshold is substantially lower, and the methodology used in determining the salary threshold is similar to the methodology used in 2004 when the white-collar exemption regulation was last updated.
In order to understand what these new changes bring and what consequences they can have, it is essential to understand exempt and nonexempt employee status fully.
Distinction between Exempt and Nonexempt
Jobs that are governed by the Fair Labor Standards Act can either be classified as exempt or nonexempt. There are precise regulations about who can be considered exempt and who can be considered nonexempt. It takes more than a job title to classify an employee.
Nonexempt Employees or hourly workers differ to exempt employees in a number of ways. It should be noted that nonexempt employees who should be paid on an hourly basis, are often improperly paid on a salary basis by their employer. Just because an employee is paid a salary, that does not automatically mean that they are exempt from the minimum wage and overtime laws. The FLSA requires that nonexempt employees:
- Earn Minimum Wages or Higher
A nonexempt employee is entitled to at least minimum wage for up to 40 hours in a workweek. The current federal minimum wage is $7.25 per hour. The minimum wage has not changed since July 2009. If a state, city, or county has a higher minimum wage rate than the federal rate, then employers are required to pay the higher amount.
- Get Overtime Pay
Hourly employees are entitled to overtime pay if they work over 40 hours in a week. They are to be compensated at no less than one and one-half times their regular rate.
- Keep Track of Records
For all nonexempt employees that are covered by the federal wage and hour provisions, employers must maintain accurate and complete time and payroll records. Here is the detailed information that employers must keep and maintain.
Exempt employees are also known as salary employees, and they are “exempt” from the FLSA minimum wage and overtime requirements. They must be paid at or above the set minimum annual compensation, and the most common exemptions fall within “white collar” workers. These include:
- Executive duties
- Administrative duties
- Professional duties
- Outside Sales duties
- Computer Employees
In order for an employee to be considered exempt and be paid on a salary, they must satisfy three criteria, which fall under salary and duty tests.
- Salary Level Test
Currently (2019), employers must compensate employees with at least $455 per week, or $23,660 per year. This is the minimum salary requirement necessary to qualify for the executive, administrative, and professional employee exemptions.
- Salary Basis Test
Although there are some limited exceptions, employees must be paid their full salary in any week they perform any amount of work in order to be classified as exempt. The quality or quantity of the work cannot affect the base salary the employee receives.
- Duties Test
An employee must perform exempt job duties that primarily involve executive, administrative, professional work as defined by regulations.
What New Regulations Bring
Once you are up to date with the distinction between exempt and nonexempt, it is time to see how the new changes can affect individuals and businesses.
- Duties Test Untouched
The new regulations made no changes regarding the duties tests on a federal level. These tests remain the same and must be met for a white-collar employee to qualify as exempt.
- Increased Minimum Salary Level
The most significant change the Department of Labor announced is in the minimum amount required for an employee to qualify as overtime-exempt. While the old regulation stated that an employee’s minimum salary requirement is $455 per week or approximately $23,660 annually, this is going to experience a significant increase. The new minimum is going to be $684 per week or $35,568 per year. This is an $11,908 jump from the old minimum, which was set in 2004. Employers must keep in mind that employees MUST be paid $684 each week they perform any work, subject to some limited exemptions, in order to be exempt.
- The 10% Rule
The final rule does contain provisions that allow employees to count some bonuses, commissions, and other non-discretionary incentives toward the minimum salary level. Up to 10% of the minimum salary can be bonuses and incentive payments, including commissions. Payments you can count towards the 10% include all commissions, any bonuses based on either personal or company performance, or safety bonuses. Essentially, any payments that are announced, clearly defined, and calculated on a particular metric and formula can count towards the 10% rule.
Utilizing the 10% rule, an employee’s weekly minimum guaranteed salary will be $615.60. You have to pay the employee bonuses and commissions that equal 3,556.80 over the year. If the payment falls short by even the shortest amount, an employee will not count as exempt. There will only be one pay period after the end of the fiscal year to make up the difference. If that payment is not met, then that employee will be classified as a nonexempt employee and will be eligible for overtime pay for all hours worked over 40 in every week in the previous year.
- Highly Compensated Level
The FLSA white-collar regulations also have a shorter duties test, which is easier to meet for employees considered highly compensated. Under the “highly compensated employee” exemption, the employee is paid a high salary and performs any one or more exempt duties. Currently (2019), employees who are paid total compensation of $100,000 per year are considered highly compensated. However, with the amendment, that employee must be paid $107,432 to classify as highly compensated. The amount MUST include a base salary of $684 per week and $35,568 per year. The rest can be any type of compensation. It is essential to state that the cost of employee benefits is not included in the $107,432.
These are some of the most critical changes that are expected as of January 1st, 2020. Employees that might be affected need to ask their boss or HR department on how the new ruling can affect you. The news is in the mainstream, and it is expected that questions will arise. Do not shy away from getting as much information as you can.
This is intended to provide a general overview of the new salary threshold for exempt employees. If you have any inquiries or concerns, it is best to get specialist advice about your specific circumstances.
Speak with an experienced wage and hour attorney in New York City today
Cilenti & Cooper, PLLC provides strong, knowledgeable guidance and legal representation to workers in the New York Metropolitan area who are not being paid their legal wages or overtime compensation. If you have questions about whether your wages are being paid appropriately, contact us or call (718) 741-7474.