New federal overtime rule set to take effect January 1, 2020

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Employment Alert

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As of January 1, 2020, US employers will be subject to a new US Department of Labor (DOL) rule implementing critical changes to the earning thresholds under the Fair Labor Standards Act (FLSA).  Finalized this fall and set to take effect in the new year, the new rule significantly modifies the legal landscape regarding wage-and-hour compliance.

Most notably, the new rule raises the minimum salary an employee must be paid to be exempt from overtime under the FLSA, from $23,660 ($455 per week) to $35,568 per year ($684 per week).  The $455 per week threshold (referred to in the rule as the "standard salary level") had been in effect since 2004.

Generally speaking, employees are exempt from the FLSA's overtime requirements if they (1) are compensated at or above the standard salary level (sometimes referred to as the "salary basis test") and (2) are a white-collar employee who works in an executive, administrative, or professional capacity, as those terms are defined in the FLSA (sometimes referred to as the "duties test"). While the new rule enacts a significant change to the salary basis test by increasing the standard salary level to $684 per week, it enacts no changes to the duties test, leaving intact the requirement that the employee also work in a qualified executive, administrative, or professional capacity.  Likewise, the new rule does not implement any changes for employees who are generally not subject to the salary basis test at all, such as doctors and lawyers.

In addition to raising the standard salary level to $684 per week, the new rule contains a handful of other important changes intended to reflect evolving pay practices in the US labor force:

  • Highly compensated employees (HCEs).  The new rule increases the total annual compensation an employee must earn in order to be exempt as a "highly compensated employee" (HCE) from $100,000 to $107,432 per year.  According to the DOL, the $107,432 figure equals the 80th percentile of weekly earnings of all full-time salaried workers nationally.  The HCE exemption applies to white collar employees who perform office or non-manual work, and customarily perform one or more of the duties required of an exempt executive, administrative, or professional employee, and who earn the (now-increased) annual salary threshold of $107,432 per year.
  • Non-discretionary bonuses and incentive payments.  Unlike the previous rule that had been in effect since 2004, the new rule permits employers to use non-discretionary bonuses, commissions, and other incentive payments to satisfy up to 10 percent of an employee's standard salary level for purposes of determining the employee's total annual compensation in a given year.  According to the DOL, the types of bonuses covered by the new rule include non-discretionary bonuses tied to productivity or profitability, such as bonuses based on a specified percentage of the employer's profits from the prior year.  To be properly "countable" under the new rule, non-discretionary bonuses and incentive payments must be made on an annual or more frequent basis.  The new rule also affords employers one pay period in which to make a "catch-up" payment in the event the employee does not earn enough in non-discretionary bonuses or incentive payments in a given year (52-week period).
  • Employees in US territories.  Workers in certain US territories will be subject to special salary levels other than the new $684 per week threshold.  For American Samoa, the standard salary level will remain unchanged at $380 per week (or $19,760 per year).  Employees in Puerto Rico, the US Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands will be subject to a salary level of $455 per week (or $23,660 per year) − the "old" standard salary level formerly in effect for all US employees prior to the new rule.
  • Employees in the motion picture producing industry.  Like employees in US territories, employees in the motion picture producing industry also are not subject to the new standard salary level of $684 per week ($35,568 per year).  Rather, employees in the motion picture producing industry are now subject to a special "base rate" threshold of $1,043 per week (or a proportionate amount based on the number of days worked).

The new rule was finalized in September 2019 and is set to take effect on January 1, 2020.

The finalized new rule reflects a handful of key differences from the previous version of the rule the DOL had proposed earlier this year, in March 2019.  For example, the finalized rule implements a larger increase to the standard salary level (formerly $455 per week) to $684 per week, as compared to the $679 per week figure proposed under the proposed rule.  Perhaps even more notably, the rule the DOL proposed in March 2019 proposed increasing the total annual compensation level for HCEs to $147,414 per year—well below the $107,432 salary level established under the finalized rule.

The DOL estimates that approximately 1.3 million US workers will become newly entitled to overtime by virtue of the new rule, and that approximately 101,800 workers will be affected by the increase in the HCE annual compensation level to $107,432 per year.  The DOL also estimates that US employees will earn approximately $298.8 million in extra pay by virtue of the new rule's changes to the FLSA's salary levels.

The new rule does not exact any changes to the federal minimum wage, which remains at $7.25 per hour.  The new rule also will not alter employers' obligations to comply with applicable state and local minimum wage laws.  As a result, the new rule − and most specifically, the increase in the standard salary level to $684 per week − likely will have minimal effects on employers in states such as New York and California where the minimum salary thresholds already exceed (and in some cases, far exceed) the federal standards.

The full text of the new rule as published in 29 CFR Part 541 of the US Federal Register may be accessed here.

For further information on steps employers should take in preparation for the changes to come January 1, 2020, please review our previous Employment Alert discussing the DOL's proposed rule.

If you have any questions regarding the new rule and its implications, please contact any of the authors or another member of the DLA Piper Employment group.