The U.S. Department of Labor (DOL) has announced a final rule that will increase access to overtime pay under the Fair Labor Standards Act (FLSA) for approximately 1.3 million workers.  The final rule, which comes six months after DOL published a proposed rule in March, is the latest development in a years-long process by DOL, spanning the Obama Administration and the Trump Administration, to modify FLSA overtime regulations.  The new rule takes effect on January 1, 2020, giving employers just a narrow window to assess the rule’s impact on their operations.  The final rule is available here.  DOL has also published a fact sheet that provides an overview of the final rule, available here.

Overview of the Final Rule

 Under the rule currently in effect, certain white-collar workers are exempt from FLSA overtime pay requirements if they are paid on a salary basis, earn a minimum salary of at least $455 per week (annualized to $23,660), and perform specified duties.  The final rule increases the minimum salary threshold for exemption to $684 per week (or $35,568 annually).  This figure is a slight adjustment from the $679 per week threshold contained in the proposed rule.  Like the proposed rule, the final rule does not make any changes to the “duties test” for exemption; thus, there will be no change to which workers qualify as “white collar” based on the job duties they perform.

The final rule allows employers, for the first time, to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the minimum salary threshold, provided that such bonuses and incentives are paid at least once per year.  Under this formulation, employers can pay 90% of the minimum compensation threshold in the form of salary ($615.60 per week/$32,011.20 annually) and the remaining 10% ($3,556.80) in the form of nondiscretionary bonuses or incentive payments.  Employers may set any fixed 52-week period as a “year” – such as a calendar year, fiscal year, or employee work anniversary – for purposes of calculating whether the employee’s salary meets the exemption threshold.  Additionally, if by the last pay period of the 52-week period, an employee’s compensation (base salary plus bonus/incentives) has not hit the minimum salary threshold, employers are permitted to make a final “catch up” payment (up to that 10% level) no later than the next pay period following the end of the year.  Failure to timely make that catch-up payment would render the employer liable for the overtime hours the employee worked in the prior year.

The final rule also modifies the Highly Compensated Employees (HCE) test.  Under existing rules, employers may apply overtime exemptions to certain employees under a reduced duties test if they meet a higher compensation threshold.  The final rule raises that threshold to $107,432 annually.  This is a small increase from the current $100,000 threshold, and a notable departure from the $147,414 threshold in the proposed rule.

DOL has indicated its intent to update the minimum salary and other thresholds on a regular basis, although it declined to adopt the four-year update schedule set out in the proposed rule.

Practical Tips for Employers

With the new overtime rule taking effect on January 1, employers should promptly consider how the changes will impact their workforce.  As an initial matter, employers should identify whether they have exempt employees whose compensation will fall beneath the new threshold and consider adjustments.  Such employees could be reclassified as non-exempt (and thus overtime-eligible) or provided a compensation increase by the January 1 deadline to keep their salary above the minimum threshold.  If employees will be reclassified, employers should determine ahead of time how much overtime is worked by these employees in order to assess budgetary impacts.  In addition, for newly classified non-exempt employees, employers will need to carefully track hours worked and pay to ensure that employees receive all overtime compensation to which they are entitled, and employees may need training on time-keeping.  Close attention should also be paid to how use of business technology (cell phones, laptops, etc.) outside the workplace and work-related travel will impact the time worked by employees converted to non-exempt status.  Employers should also note that the new rule provides an opportunity to audit the FLSA status of all employees and coordinate any needed changes with the implementation of the new rule.

As part of any reclassification plan, employers should be alert to morale issues that could stem from converting exempt employees to nonexempt, including using care with how the changes are messaged so that employees understand they are not being demoted or otherwise suffering an adverse employment action.  Employees may also be frustrated with necessary changes to their timekeeping habits and reduced schedule flexibility, and managers may feel overburdened if they are required to take on extra work that used to be done by employees who have been reclassified.  Employers should engage with legal and human resources stakeholders to anticipate issues arising from these changes.

Employers should keep in mind that some states, such as California, continue to have stricter requirements and salary thresholds for overtime exemption than the FLSA.

As with prior changes to the overtime regulations, DOL may face litigation that attempts to enjoin or invalidate the final rule.  Employers should continue monitoring this issue at least through the implementation of the final rule on January 1, 2020.

Further background on the development of the overtime rule, including the March 2019 proposed rule, is available here.