Last month, the U.S. Department of Labor published its long-awaited Final Rule to the “white collar” overtime exemptions which will go into effect on January 1, 2020.
The federal Fair Labor Standards Act (FLSA) overtime rule determines whether employees are eligible or exempt for overtime pay.
To be exempt from overtime under the FLSA, employees must be paid a salary of at least the threshold amount and meet certain tests regarding their job duties. If they are paid less or do not meet those tests, they must be paid one-and-a-half times their regular hourly rate for hours worked in excess of 40 in a workweek.
The new rule will raise the salary threshold from $455 a week ($23,660 annualized) to $684 a week ($35,568 annualized). It will also allow employers to pay up to 10 percent of that minimum level ($3,556.80) in commissions, bonuses, and other non-discretionary incentives.
Such bonuses include nondiscretionary incentive bonuses tied to productivity or profitability. For employers to credit nondiscretionary bonuses and incentive payments (including commissions) toward a portion of the standard salary level test, such payments must be paid on an annual or more frequent basis.
For example, instead of guaranteeing a salary of $684 per week, an employer could pay $615.60 per week and provide incentive pay, bonus, or commission equal to $3556.80 (10 percent of $35,568) at the end of the year to reach to the salary threshold.
Exempt vs. Nonexempt
Exempt Employees: Employers must pay a salary rather than an hourly wage for a position in order for it to be exempt. Exempt positions are excluded from minimum wage, overtime regulations, and other rights and protections afforded nonexempt workers. Typically, only executive, supervisory, professional or outside sales positions are exempt positions.
Nonexempt Employees: Employees who fall within this category are not exempt from FLSA requirements. They must be paid at least the federal minimum wage for each hour worked and given overtime pay of not less than one-and-a-half times their hourly rate for any hours worked beyond 40 hours each week.
The new rule is expected to prompt employers to reclassify more than a million currently exempt workers to nonexempt status and raise pay for others above the new threshold.
Meeting the salary threshold doesn’t automatically make an employee exempt from overtime pay—the employee’s job duties also must primarily involve executive, administrative or professional duties as defined by the regulations.
And while the new rule has raised the salary threshold, there were no changes to the current duties test.
White Collar Exemptions
Each of the three white-collar exemptions has slightly different criteria which it’s important that employers review:
Executive Exemption: The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers (or the employee’s suggestions and recommendations as to hiring, firing or changing the status of other employees must be given particular weight).
Administrative Exemption: The employee’s primary duty must be performing office or nonmanual work that is directly related to the management or general business operations of the employer or the employer’s customers. The employee’s primary duty also must include the exercise of discretion and independent judgment with respect to matters of significance.
Professional Exemption: The employee’s primary duty must be to perform work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction and study.
Practices with exempt employees who currently earn more than $455 per week, but less than $684 per week, and who satisfy the duties requirements, will need to either increase the employee’s salary to the new level or re-classify the employee as non-exempt.
It is important for practices to consider how the new rule interacts with state laws. The general rule in employment law is that businesses must comply with the law that provides the most protection for the employee.
So, for example, in states that have their own exemption tests—such as California—the employer must satisfy whichever salary threshold is greater, whether it’s the federal or state rate.
Additionally, some states may have different duties tests as well as salary cutoffs, and it is important to understand and comply with the more stringent of the applicable rules.
You can read a list of FAQs regarding the Final Rule here.
For additional questions or assistance, please contact Consult YHN’s Human Resources Manager, Jodi Bryan, at 800-984-3272 ext. 305 or firstname.lastname@example.org or Director of Recruiting, Ernie Paolini, at 800-984-3272 ext. 327 or email@example.com.