CLIENT ALERT: U.S. Department of Labor Issues Final Overtime Rule
On September 24, 2019, the U.S. Department of Labor announced its much-anticipated final rule raising the salary thresholds for executive, administrative, and professional workers to be considered exempt from overtime and minimum wage requirements to $684/week (or $35,568/year). The final rule also increases the salary threshold for highly compensated employees from $100,000 to $107,432 per year. The DOL estimates that 1.2 million currently exempt employees will gain overtime eligibility under the new rule, which will go into effect on January 1, 2020.
These changes are consistent with several provisions from the proposed rule announced in March and discussed at Potter Anderson’s labor and employment seminar in May. Like the proposed rule, the final rule allows employers to satisfy up to 10% of the salary threshold with nondiscretionary bonuses and/or incentive payments, including commissions. The final rule also permits a one time “catch-up” payment, which allows employers to make one-time payments of up to $3,556.80 within one pay period of the end of the year to maintain an employee’s exempt status if the employee’s compensation falls short of the $35,568 annual salary threshold.
Unlike the proposed rule, the final rule does not require the DOL to increase the salary threshold every four years. It does commit, however, to periodic increases in the salary thresholds based on the 20th percentile of full-time salaried workers in the lowest-wage census region and/or in the retail industry nationally. In addition, the DOL will periodically adjust the level for highly compensated employees based on the 80th percentile of earnings of full-time salaried workers nationally. Increases will only occur after a period of public notice and comment. Therefore, future updates to the salary levels should be predictable.
The new rule has two primary ramifications for employers. First, before January 1, 2020, employers should reassess employees’ exemption status under the new salary thresholds. Employers should consider conducting this analysis without incorporating the 10% credit for nondiscretionary bonuses, as the administrative burden associated with tracking these payments may not be worth the relatively slight benefit for most employers. In addition, employers should consider whether raising salaries to maintain employees’ exempt status will outweigh future overtime payments. If employers choose to reclassify employees, employers should ensure that reclassified employees are trained on their new timekeeping processes. Second, employers who choose to rely on nondiscretionary bonuses or incentive payments to maintain employees’ exempt status should update payroll systems to ensure that employees who do not meet the salary threshold at the end of the year receive a catch-up payment to maintain their exempt status.