CLIENT ALERT – The Department of Labor Announces New Rule on Salary Level for White Collar Exemptions

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CLIENT ALERT 

By: Mark Ventola and Jim Reidy

On September 23, 2019 the United States Department of Labor (“US DOL”) issued its Final Rule (the “Rule”) updating the Fair Labor Standards Act regulations governing the salary level needed to qualify for the so-called “white collar exemptions.” These exemptions apply to executive, administrative, and professional employees and also to those who fall within the regulatory meaning of “highly compensated.” The new Rule will be effective as of January 1, 2020, so there is time to prepare for this change.

 What should employers know?

The Minimum Salary Has Increased Substantially:

The salary level required to meet the white collar exemptions will be increased from the longstanding amount of $23,660 per year ($455 per week) to $35,568.00 per year ($684 per week). This threshold is lower than what had been proposed and approved by the Obama administration’s Department of Labor ($47,476/$913), but remains a substantial increase that will cause a need to reclassify many workers, both full and part time, from exempt to non-exempt. It is estimated that as many as 1.3 million Americans will now be eligible for overtime under the new Rule.

As a reminder, in order to be exempt from overtime obligations under the federal Fair Labor Standards Act (FLSA), employees must be paid a salary every work week, the salary must be at least the threshold amount, and the employee’s actual day to day activities in the job must also meet the criteria under established duties tests. If employees are paid less or do not satisfy the elements of duty tests, they are considered to be “non-exempt” and must be paid 1 1/2 times their regular hourly rate for hours worked in excess of 40 in a workweek.

No Automatic Increases:

Unlike prior drafts of regulations, the Rule does not require automatic increases in the salary level. The US DOL has stated, however, that it will review the salary level on a more regular basis than has been the case in the past.

The Duties Tests Were Not Changed:

The proposed regulations and US DOL commentary suggested that the duties tests were being considered for update.  The final regulations, however, leave the duties tests unchanged which is a significant win for employers.

Non-Discretionary Bonuses, Commissions and Incentive Pay:

Employers will now be able to satisfy the new salary level, in part, through applying commissions, non-discretionary bonuses, and other incentive compensation.  There is, however, a limit to the use of such compensation with employers being allowed to apply only 10% of the salary in this fashion.

High Compensated Exemption:

The Rule also updated the threshold for the “highly compensated exemption” salary at $107,432.00 per year, up from the current level of $100,000.00.

Effective Date and Suggested Steps to Prepare for the Change:

The effective date of the Rule has been set as January 1, 2020.  In the interim, employers should consider the alternatives for compliance, including:

  • Remember that payment on a salary basis is NOT the sole determining factor in overtime exemptions
  • A review of job descriptions for exempt employees to be sure they reflect the actual day to day activities of those employees;
  • Determine if all currently exempt positions are properly classified as overtime exempt;
  • Where needed increasing properly classified exempt employees’ salaries to at least the new salary level and continuing to treat employees as exempt (assuming they satisfy both the salary basis and the applicable duties test requirements);
  • Reclassifying formerly exempt employees as non-exempt and paying overtime for hours worked over 40;
  • When an employee was formerly treated as overtime exempt but will now be non-exempt educate the employee on proper timekeeping methods to track all work hours;
  • Train managers and supervisors on time keeping and pay practices for both exempt and non-exempt employees;
  • Prepare to factor in commissions, non-discretionary bonuses and other incentive compensation, as applicable, to meet the salary threshold
  • Prepare to make these changes by January 1, 2020 BUT only make changes now for improperly classified employees applying the current standards
  • Prepare announcements and FAQs to be distributed to impacted staff and consider the benefit of staff meetings in advance of the change to answer questions; and/or
  • Reducing employee hours where possible to avoid overtime work.

These changes have been in the works for some time. While the proposed overtime changes under the Obama Administration were stalled by legal challenges it is less likely that this new Rule will face the same opposition but like any other proposed bill or rule coming out of Washington politics could still play a role in the implementation of these changes. Stay tuned.  In the meantime, we hope that this has been helpful.

 

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Jim Reidy and Mark Ventola are shareholders at Sheehan Phinney Bass & Green. Mark and Jim cochair the firm’s Labor and Employment practice group.

This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice.