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DOL Update: Understanding the New Overtime Final Rule

10/11/19 – Deirdre Bird

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The U.S. Department of Labor (DOL) has released the finalized rule on overtime exemptions for white-collar workers under the Fair Labor Standards Act (FLSA). The rule, which is scheduled to take effect on January 1, 2020, updates the standard salary levels for the first time since 2004. The most notable change is the requirement that employees who make less than $35,568 per year or $684 per week — up from $23,660 per year or $455 per week — be classified as nonexempt regardless of the employee’s job duties. The rule also increases the total annual compensation requirement for high compensated employees (HCEs) to $107,432, up from the current level of $100,000 per year; HCEs must also make at least $684 per week on a salary or fee basis.

An employer generally can’t classify an employee as exempt from overtime obligations unless the employee satisfies three tests:

  1. Salary basis test. The employee is paid a predetermined and fixed salary that isn’t subject to reduction because of variations in the quality or quantity of the work performed. The new rule did not change the salary basis test.
  2. Salary level test. Under the new rule, the employee must be paid at least $684 per week or $35,568 annually.
  3. Duties test. The employee primarily performs executive, administrative or professional duties. The new rule does not change the duties test.

Be aware that job title or salary alone doesn’t support an exemption — the employee’s specific job duties and earnings also must meet applicable requirements. The specifics of the duties test vary depending on the exemption. For the executive exemption, for example, the employee’s primary duties must be managing the organization or a department. He or she also must customarily direct the work of at least two full-time employees, with authority or significant say in employment actions such as the hiring, firing, advancement, or promotion of workers.

Neither the salary basis nor the salary level test applies to certain employees (for example, doctors, teachers and lawyers). And there are more relaxed duties test for HCEs, who need only regularly perform one of the primary duties required for the executive, administrative or professional exemption.

The new rule

Employers can use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level test. If an employee doesn’t earn enough in such bonuses or payments in a given year to remain exempt, the employer can make a catch-up payment within one pay period of the end of the year. The payment will count only toward the prior year’s salary amount, though.

The rule also uses three years of pooled data to estimate the HCE compensation level.

The rule does not include automatic adjustments to the salary thresholds. Instead, the rule simply indicates the DOL’s intent to update the earnings thresholds “more regularly in the future,” following the notice-and-comment rulemaking process.

Preparation tips

In 2016, the DOL released a final rule for FLSA changes. Many employers made changes in anticipation of the rule’s implementation, prior to the rule’s being blocked by a federal district court judge. At this point, employers may feel like they’re stuck in the movie “Groundhog Day,” repeatedly preparing for impending changes to the overtime rules. And it’s likely that the latest round of changes also will face court challenges. Nevertheless, employers should begin taking measures to achieve compliance — and minimize the hit to their finances — when the final rule takes effect. You may have a leg up if you’ve already gone through this process, but you shouldn’t rely on your past findings, as circumstances may have shifted.

To begin with, check your employees’ salary levels against the new thresholds. It may be advisable to give raises to employees who fall just under a threshold and routinely work more than 40 hours per week. Or you might want to redistribute workloads or scheduled hours to prevent newly nonexempt employees from working overtime.

This also is a good time to review your employees’ job duties against the tests for the various exemptions. You should check duties on a regular basis, as this is a ripe area of litigation. Courts and the DOL agree that actual duties, not job title or even job description, are what matters.

If you’ll be reclassifying currently exempt workers as nonexempt, you must establish procedures for accurately tracking their time to ensure proper overtime compensation is paid. Reclassified employees may require some training on timekeeping procedures. They also might need some reassurance that they’re not being demoted.

Plan accordingly

Some employers may find that the new overtime rule substantially increases their compensation costs, including their payroll tax liability. We can help ensure that your company is in compliance with the new rule, as well as all payroll tax obligations.