The overtime salary threshold has been a topic of much debate and discussion in the U.S. Department of Labor for the last several years. The Fair Labor Standards Act (“FLSA”) requires employers to pay their employees overtime for all hours worked in excess of 40 hours in a workweek unless the employee is considered “exempt” under the FLSA. In order to be considered exempt, the employee must generally be paid a minimum salary (the “salary threshold”) and the employee must also perform certain kinds of job duties (the “job duties” test). The current overtime salary threshold, which is $455 per week (or $23,660 per year), has been in effect for the last 15 years.
In 2016, the DOL adopted a significantly higher, controversial overtime salary threshold, which would have more than doubled the current overtime salary threshold and increased the salary threshold to $913 per week ($47,476 per year). However, in late 2016, a Texas federal judge issued a nationwide injunction, preventing the new overtime salary threshold from taking effect. The court reasoned that the new salary threshold essentially became the primary consideration for eligibility for overtime pay and essentially displaced the job duties test which had historically been the primary determinate for eligibility under the FLSA. Following issuance of this injunction, the DOL “went back to the drawing board” to re-evaluate the overtime salary threshold in light of the court’s ruling. During this process, the DOL requested input from the business community and from employees and received hundreds of thousands of comments from both employer-focused and employee-focused groups and individuals. Most agreed that some update to the salary threshold was needed in order to reflect the current cost of living and economic realities and to account for the fact that there had not been an update to the salary threshold for 15 years.
In September of this year, the DOL announced a new, long awaited increase to the overtime salary threshold, setting the new salary threshold at $684 per week ($35,568 per year). The new salary threshold will go into effect on January 1, 2020. Unlike the 2016 version of the rule, which included automatic updates to the salary threshold for the future, the new rule does not include automatic updates, though the DOL did indicate that it would review the salary threshold from time to time as prevailing economic conditions dictate in the future. Also a new addition to the rule, if an employee is paid a non-discretionary bonus or other incentive-based compensation (i.e., commissions) at least once a year, those additional payments can be used to satisfy up to 10% ($3,556 per year) of the salary threshold amount. Discretionary bonuses, however, are not considered and do not count for purposes of satisfying the salary threshold amount.
The DOL rule does not make any changes to the job duties test, which continues to be viewed by the DOL as the primary determinate of eligibility for overtime pay under the FLSA.
What does this mean for employers? Beginning January 1, 2020, employees who earn less than $684 per week ($35,568 per year) will no longer be “exempt” from overtime pay under the FLSA, regardless of the types of duties that these employees perform. Thus, employers must begin paying these employees overtime pay for all hours worked in excess of 40 hours per workweek. If an exempt employee currently earns slightly less than the new overtime salary threshold amount, employers may want to consider increasing the employee’s compensation to the new salary threshold amount to allow the employee to remain “exempt” under the FLSA.
Employees earning at least the new salary threshold amount may be “exempt” from overtime pay under the FLSA if they perform certain types of duties falling within the scope of exempt duties under the job duties test. Employers should carefully review the listed exemptions in the FLSA to confirm that employees who are being paid at least the new overtime salary threshold amount are in fact performing exempt duties so as to satisfy the job duties test before continuing to classify these employees as “exempt” under the new rule. If employees do not meet the job duties portion of the test under the FLSA, employers should reclassify these employees as non-exempt to coincide with the new rule beginning on January 1, 2020.
If employers have questions about the new DOL rule or classification of employees as exempt or non-exempt, they should promptly seek the assistance of legal counsel experienced in the employment law arena. Employee misclassification continues to be one of the primary focuses of DOL investigations today. Working with experienced legal counsel could help employers head off future DOL investigations and complaints regarding misclassification and other hot button topics and issues.