The U.S. Department of Labor (DOL) recently announced its long-awaited final rule updating the salary threshold for executive, administrative, and professional employees who are classified as exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). These are often referred to as the “white collar” exemptions. The new rule will take effect on January 1, 2020.

What is the new minimum salary?

Earlier this year, the DOL released a proposed rule that would have raised the minimum salary level for white collar exempt employees to $679 per week, or $35,308 per year. After evaluating compensation data and considering many thousands of public comments, the DOL increased those figures slightly in the final rule. The new salary threshold will be $684 per week, or $35,568 per year. To set that salary level, the DOL looked at the 20^thpercentile of earnings of full-time salaried workers in the lowest-wage census region (the South) and of retail sector workers nationally.

Computer professionals continue to be the one type of professional employee that may be paid hourly, and the minimum hourly rate remains unchanged at $27.63. For those paid a salary, however, the salary must meet or exceed the new minimum.

Why was the minimum salary increased?

The DOL has not changed the salary level in its overtime rules for 15 years. The agency is updating the rule now to “account for growth in employee earnings” during that time, and to “help employers more readily identify exempt employees.” A rule change was attempted during the Obama administration that would have dramatically increased the minimum salary, to more than $47,000 per year, but this rule was blocked in court and has not been enforced by the current administration.

Must employees still satisfy the duties tests for exemption?

Yes. Salary level is only one aspect of exempt status. The employee also must meet the duties test for at least one of the exemptions or a combined exemption. The duties tests are not changing, so the criteria that have been in place in 2004 continue to guide classification decisions. The administrative exemption is often the most difficult to apply because the criteria are the most subjective. 

What about highly compensated employees?

Some employers have taken advantage of an exemption for highly compensated employees (HCE) that was first created in 2004. For this exemption to apply, the employee must customarily and regularly perform at least one of the exempt duties of an executive, administrative, or professional employee, but need not satisfy a full duties test. The final rule raises the total annual compensation level for HCEs from $100,000 to $107,432 per year, with at least $684 per week, or $35,568 per year, being paid in a fixed regular salary. The total compensation figure is equivalent to the 80^thpercentile of all full-time salaried workers nationwide. 

Do any other types of compensation count toward meeting the salary minimum?

Under the final rule, employers may use nondiscretionary bonuses (such as those tied to productivity or profitability) and incentive payments, including commissions, to satisfy up to 10% of the minimum salary level ($3,556.80) for the white collar exemptions. The bonuses or incentive payments must be paid at least annually. These additional forms of compensation may notbe used to satisfy the minimum salary under the HCE exemption, but do count toward the remaining $72,000 in annual compensation that is required for the exemption to apply.

If an employee does not earn enough in non-discretionary bonuses or incentives in a given 52-week compensation year to retain exempt status, the employer may make a “catch-up” payment within one pay period after the end of the compensation year. If this payment is not made in the allotted time, the exemption is lost and the employee becomes eligible for overtime pay.

Will there be further increases to the salary threshold in the future?

Yes. The DOL decided not to provide for automatic updating or set a fixed schedule for further revisions, believing this would deprive the agency of “flexibility to adapt to unanticipated circumstances.” However, it did commit to updating the salary level more frequently than in the past, taking into account “prevailing economic conditions.” More frequent updates should result in smaller incremental increases each time.

What should employers do now?

We recommend that employers review compensation levels for all employees in the organization who are classified as exempt to determine who is currently being paid less than the new minimum salary level. This is also a good time to evaluate whether exempt employees are properly classified as such, and whether there are any pay disparities among similarly situated employees that should be addressed.

For some employees, an employer may decide to come into compliance by increasing the employee’s salary above the threshold (taking into account any applicable non-discretionary bonuses or incentives). Of course, to the extent that an employer has developed an integrated compensation system designed to treat employees similarly across various position titles or groups, raising the pay of one employee or a group of employees might have a ripple effect on other employees who otherwise would be unaffected by the changes in the law.

In other cases, it will be necessary to reclassify the employee’s position as non-exempt, making the employee eligible for overtime pay for all hours worked beyond 40 in a workweek. Because reclassification decisions will have ramifications for both the employer and the affected employee, prudent employers will begin planning for those transitions as early as possible. For example, the company may want to convert an employee’s pay from a salary to an hourly rate (to simplify calculation of overtime), and the employee will need to begin tracking work hours and following the company’s timekeeping policies (including any rules related to approval for overtime work). Additionally, employee benefits, such as paid time off, may be affected if an employer’s benefit offerings are different for exempt and non-exempt employees.

Our Employment Group is ready to work with you to help assess current employee compensation and classification, and we are dedicated to providing the highest level of service to ensure that you experience a smooth transition to the new salary threshold. Do not hesitate to contact any one of us with questions or for assistance.