DOL Increases Salary Threshold for White-Collar Overtime Exemptions to $35,568

On Tuesday, the U.S. Department of Labor issued a long-anticipated update to its regulations governing employee entitlement to overtime pay under the Fair Labor Standards Act, as amended. In the final regulation, which comes on the heels of the DOL's proposed regulation in March, the minimum salary necessary for a white-collar employee to be exempt from overtime pay increases from the current level of $455/week ($23,660/year) to $684/week ($35,568/year) effective January 1, 2020. The "duties tests" – which are used to determine whether a worker performs exempt work – remain unchanged. Workers who do not qualify for an exemption must be paid 1.5 times their regular hourly rate for hours worked in excess of 40 during a workweek.

The revisions to the salary threshold for overtime pay exemptions will result in a large number of currently overtime-exempt employees becoming entitled to overtime pay. Under current regulations, white-collar workers who earn a salary of at least $455/week and who perform certain executive, administrative or professional functions are exempt from overtime pay even if they work more than 40 hours per workweek. Under the new regulation, such employees will no longer qualify for an exemption from overtime pay unless they earn a salary of at least $684/week. The DOL estimates that as many as 1.3 million additional workers will qualify for overtime pay once the new regulation takes effect in 2020.

Basis of the Change

Employers who have been keeping an eye on overtime regulations will remember that in 2016, at the tail end of the Barack Obama administration, the DOL issued a final regulation that would have raised the minimum salary threshold for an exemption from overtime pay even higher: to $913/week ($47,476/year). Just as the Obama-era regulation was set to take effect, however, a federal district court judge in Texas invalidated it. The District Court concluded that the significant increase in the salary threshold adopted in the 2016 regulation conflicted with the FLSA, which, historically, has been interpreted to authorize a salary test only to weed out employees unlikely to be executives, administrators or professionals because of relatively low compensation. In the District Court’s view, the 2016 regulation's doubling of the salary threshold not only weeded out blue-collar workers with relatively low compensation but also prevented white-collar employees actually doing executive, administrative or professional work from qualifying for exemptions from overtime pay.

In an effort to avoid the fate of the 2016 regulation, the DOL's new regulation sets the salary threshold of $684/week ($35,568/year) by applying a nearly identical methodology to that the DOL used when setting the current $455/week ($23,660/year) salary threshold. That is, in 2004, when the current threshold was adopted, a salary of $455/week represented the salary earned by the 20th percentile of full-time salaried workers employed in the retail sector in the lowest-wage census region (the South). Today, in the DOL's estimation, workers in the South and/or workers in the retail industry nationwide, employed on a full-time basis, whose salaries are in the 20th percentile of their peers, would earn $684/week ($35,568/year). The DOL believes that this methodology for setting the salary threshold is more likely to survive legal scrutiny.

Other Changes in the Regulation

The revised salary test is not the only change in the new regulation.

In addition to the new salary threshold, the DOL's regulation also increases the salary threshold necessary for an employee to qualify for an exemption from overtime pay under the Highly Compensated Employee exemption. Currently, employees who perform at least some characteristics of white-collar work and who earn a minimum of $100,000/year qualify for the Highly Compensated Employee exemption. That salary threshold increases to $107,432/year under the DOL's new regulation – a lower increase than the Obama-era regulations ($134,004) and the DOL's proposed regulation in March ($147,414).

The new regulation also provides that incentive payments (including commission pay) and non-discretionary bonuses can count for up to 10% of an employee's salary for purposes of determining whether an employee meets the new salary test, so long as such incentive pay is paid at least annually. This provision was also a feature of the DOL's 2016 regulation and the March proposed regulation.

Finally, one aspect of the March proposed regulation is conspicuously absent from the final regulation. In March, the DOL had proposed building in a timeline for regularly revising the salary test every four years. In the final regulation, the DOL reaffirms its commitment to regularly revisiting the salary thresholds for overtime exemptions, but declines to set a specific timeline for updates. Instead, the DOL plans to update the overtime regulation "from time to time" as appropriate.

Next Steps

As noted above, the DOL's new regulation will take effect on January 1, 2020. While it is possible that legal challenges could delay that date, the fact that the DOL has set the salary threshold in today's regulation using virtually the same methodology it used in 2004 makes it more likely that today's regulation will survive judicial scrutiny. Thus, employers should begin taking steps to ensure they are in compliance with the new regulations before the anticipated effective date. In particular:

• Employers should review the FLSA classification status for all employees to ensure proper classification for purposes of overtime pay once the new regulation takes effect.
• Employers should review and update job descriptions to ensure that the descriptions accurately reflect job duties and FLSA classification status.
• In instances where currently overtime-exempt employees earn under the salary limit of $684/week – and, thus, would become non-exempt once the new regulation takes effect – employers should consider whether there is room in their budgets to increase pay so that employees continue to qualify for exemption from overtime pay. Employers could also consider adjusting head count or schedules to minimize the need to pay overtime wages to non-exempt employees.
• With the prospect of some employees moving from exempt to non-exempt classification under the FLSA, employers should begin planning how to communicate the change in classification status to affected employees. Now is also a good time for employers to revisit their overtime policies to ensure that policies are up-to-date. Non-exempt employees should understand their time-keeping obligations, whether supervisor permission is required to work overtime, and whether they can access company email/mobile phones outside of their normal business hours.

The Employment and Labor attorneys at Robinson Bradshaw are available to consult and partner with clients to navigate the impact of the new regulation on a client's particular workforce and overall staffing strategy.