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On January 1, 2020 – following more than three years of lawsuits, negotiations, and regulatory limbo – the United States Department of Labor’s (the “DOL”) long-anticipated updates to federal overtime pay requirements took effect nationwide. Finalized by the DOL last fall, the new rules extend overtime pay to a projected 1.3 million more workers under the Fair Labor Standards Act (the “FLSA”)
The FLSA is a federal labor law governing minimum wage, overtime pay, and child labor standards for most private and public sector employees. With respect to overtime pay requirements, the FLSA entitles “non-exempt” employees, who work in excess of 40 hours in a workweek, to overtime pay at a rate of at least one and one-half times their regular rate of pay.
Employees are considered “exempt” from overtime pay if they satisfy certain tests regarding their job duties, form of compensation (salary or hourly pay), and rate of pay. For example, under the FLSA’s more common “white-collar” exemptions, an employee is ineligible for overtime pay if all of the following apply:
1) The employee primarily performs executive, administrative, or professional duties, as defined under the law (the “duties test”);
2) The employee is paid a fixed salary (the “salary basis test”); and
3) The employee is paid at least the minimum weekly salary necessary for an exemption (the “salary level test”).
The FLSA also provides an exemption for “highly-compensated employees.” A highly-compensated employee is deemed ineligible for overtime pay if all of the following apply: 1) The employee customarily and regularly performs at least one of the duties of an exempt executive, administrative, or professional employee;
2) The employee’s primary duties include performing office or non-manual work; and
3) The employee earns the minimum annual compensation (including minimum weekly pay on a salary or fee basis) necessary for an exemption.
The DOL provides a detailed description of the white-collar and highly-compensated employee exemptions, including the applicable duties tests, on its website:
Summary of Updates
The following changes to overtime pay requirements took effect January 1, 2020:
Increase in Minimum Salary Level
Under the new overtime rules, the DOL raised the minimum salary threshold for white-collar exemptions from the previously-enforced level of $455 per week to $684 per week
($35,568 annually). As of January 1, 2020, employees who earn less than $684 per week must be paid overtime pay for all hours worked in excess of 40 hours in a workweek, regardless of whether their job duties are classified as executive, administrative, or professional.
This update marks the first change to the federal minimum salary threshold for overtime pay in 15 years.
Including Nondiscretionary Bonuses & Incentive Pay
When determining whether an employee is exempt from overtime pay, the new rules allow employers to include certain nondiscretionary bonuses and incentive payments (including commissions) when calculating an employee’s minimum salary level. Provided that the bonus and/or incentive payment is paid at least annually to an employee, an employer is now permitted to apply the amount toward satisfying up to ten percent of the minimum required salary (ten percent of the minimum annual salary level is $3,556.80).
Increase in Annual Compensation Threshold for Highly-Compensated Employees
In addition to raising the minimum salary level for white-collar exemptions, the DOL also raised the minimum annual compensation necessary to satisfy the highly-compensated employee exemption. Previously, the compensation threshold for highly-compensated employees was $100,000 annually. Effective January 1, 2020, an employee must earn at least $107,432 annually to be considered a highly-compensated employee under the FLSA.
No Changes to Duties Tests
The new overtime rules do not make any changes to the descriptions of the job duties required for meeting the FLSA’s white-collar exemptions.
Suggestions for Employers
To ensure compliance with overtime pay requirements, employers should take the following steps:
• Identify all employees presently classified as exempt who are making less than the new minimum salary level of $35,568 annually. For identified employees, begin paying them overtime pay for any hours worked in excess of 40 hours per workweek, or, alternatively, increase their salary to the minimum salary level required for an FLSA exemption ($35,568 annually).
• Take the opportunity to review all employee overtime classifications to make certain that employees are correctly designated exempt or non-exempt.
• Notify employees in writing of any reclassifications (e.g., exempt to non-exempt status). For newly non-exempt employees, provide instruction on time-keeping and overtime procedures.
• Update payroll records and job descriptions as applicable to reflect any reclassifications.
For additional information regarding the new FLSA overtime rules, employers are encouraged to contact the attorneys at Milligan Lawless.