Labor Department’s new salary rule could impact 1 million workers around the country.
By Alexandra Walsh
The U.S. Department of Labor has increased the minimum salary requirement to be considered exempt from overtime under the Fair Labor Standards Act (FLSA). The rule took effect January 1, 2020.
The FLSA requires most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 in a workweek.
However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional (EAP), and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees.
These exemptions are often called the white-collar or EAP exemptions. To qualify for exemption, employees must meet certain tests regarding their job duties and—as of the beginning of 2020—be paid on a salary basis at not less than $684 per week.
The exemptions provided by FLSA Section 13(a)(1) do not apply to manual laborers or other blue-collar workers, including non-management construction workers, who perform work involving repetitive operations with their hands, physical skill, and energy.
Under Department of Labor regulations, these nonexempt blue-collar employees gain the skills and knowledge required for performance of their routine manual and physical work through apprenticeships and on-the-job training, not through the prolonged course of specialized intellectual instruction required for exempt learned professional employees.
FLSA-covered, non-management employees in production, maintenance, construction, and similar occupations (such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, and laborers) are entitled to minimum wage and overtime premium pay under the FLSA and are not exempt under Section 13(a)(1) of the FLSA nor the regulations at 29 CFR Part 541 no matter how highly paid they might be.
Who Will Be Impacted
Certain employees who make less than $35,568 are now eligible for overtime pay.
To be exempt from overtime under the federal FLSA, employees must be paid a salary of at least the threshold amount and meet certain duties tests. If they are paid less or do not meet the tests, they must be paid one and one-half times their regular hourly rate for hours worked in excess of 40 in a workweek.
The new rule raises the salary threshold to $684 a week ($35,568 annualized) from $455 a week ($23,660 annualized).
The new rule is expected to prompt employers to reclassify more than 1 million currently exempt workers to nonexempt status and raise pay for others above the new threshold.
Under the new rule, nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10% of the standard salary level.
In addition to raising the salary cutoff for exempt workers, the new rule raises the threshold for highly compensated employees from $100,000 a year to $107,432 (of which $684 must be paid weekly on a salary or fee basis).
For the FLSA’s executive, administrative, and professional exemptions—the so-called white-collar or EAP exemptions—employees must perform certain duties and earn at least the salary threshold. But under a special rule, highly compensated employees are eligible for exempt status if they meet a reduced duties test as follows:
- The employee’s primary duty must be office or non-manual work.
- The employee must “customarily and regularly” perform at least one of the bona fide exempt duties of an executive, administrative, or professional employee.
Employers should note the rule doesn’t make any changes to the duties tests. Also, the new rule doesn’t include automatic adjustments to the exempt salary threshold.
The new rule also permits employers to make a final “catch-up” payment within one pay period after the end of each 52-week period to bring an employee’s compensation up to the required level.
Specifically, the rule would allow an employer to pay an employee 90% of the salary level ($611.10 per week) and if at the end of the 52-week period, the salary paid plus the non-discretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 52 weeks ($35,308), the employer would have one pay period to make up for the shortfall (up to 10% of the standard salary level or $3,530.80).
Review Job Descriptions and Budgets
Employers who have not already done so should pull data for exempt workers earning below the threshold. They should also review budgets.
Employers may want to weigh the cost of raising employee salaries above the new threshold against the cost of reclassifying employees as nonexempt and paying overtime. It is an individual workforce determination that should be made in consultation with human resource professionals and outside counsel to ensure compliance with the new rules.
Meeting the salary cutoff is just one requirement for classifying workers as exempt. Employers should also take the time to review workers’ job duties to ensure they satisfy the applicable exemption’s criteria.
The white-collar exemptions each have slightly different duties tests:
- 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 office or non-manual 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 work requiring advanced knowledge in a field of science or learning
that is customarily acquired by prolonged, specialized, intellectual instruction, and study.
Although the changes to the overtime rule are all about salary, the upcoming adjustments provide a good opportunity for employers to look at the job duties for their lowest exempt pay bands and make sure they actually qualify.
In general, it’s a good idea for employers to periodically review job descriptions and ensure they are up-to-date and accurate.
Develop a Training and Communication Strategy
Once you have decided what changes you will make, communicate them to impacted employees as early as possible. Check your state law for any specific timeframes for providing such notice.
If employers decide to reclassify employees to nonexempt status, they will need to track affected workers’ work time and pay overtime premiums for all hours worked beyond 40 in a workweek.
Employers will need to develop a communication strategy and make sure reclassified employees know they are not being demoted. Be clear these changes are based on new government rules.
In addition, employees who will be required to track their hours for the first time—as well as their managers—will need training on timekeeping procedures.
Under the FLSA, hours worked include not only time spent working, but also certain nonproductive time such as rest breaks, travel time, and training time.
Employers should evaluate their systems for timekeeping, tracking overtime, and paying bonuses. They should also develop plans and procedures to manage or limit overtime hours worked by newly nonexempt workers.
Taking some initial steps sooner rather than later will go a long way toward sorting out potential issues and creating a smooth transition plan.