The U.S. Department of Labor (DOL) announced its final rule on Sept. 24 under the Fair Labor Standards Act (FLSA) that results in an additional 1.3 million American workers being entitled to overtime pay.
The FLSA requires covered employers to pay employees who work more than 40 hours per week overtime pay (1.5 times the employee’s regular rate of pay). However, there are certain exemptions to this general rule. The FLSA includes a “white collar exemption” or the “EAP” exemption for bona fide executive, administrative, or professional employees.
The EAP exemption generally requires that an employee: (1) be paid a predetermined or fixed salary that is not subject to reduction based on quantity or quality of work (salary basis), (2) receive a salary that meets a minimum specified amount (salary level), and (3) have duties that primarily involve executive, administrative or professional duties (duties test).
The key provisions of the final rule raise the standard salary level for the EAP exemption and for highly compensated employees and allow employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the standard salary level.
Currently, employees with a salary below $455 per week ($23,660 annually) must be paid overtime pay if they work more than 40 hours per week. The current salary level was last updated 15 years ago. The final rule reflects the growth in employee earnings since the last update.
The proposed rule increases the standard salary level to $684 per week ($35,568 per year). Under the final rule, employees with a salary below $684 per week will be entitled to overtime pay for all time worked over 40 hours per week.
The final rule also increases the salary level for “highly compensated employees” (HCE) from $100,000 to $107,432 per year. The highly compensated employee exemption has a reduced “duties test” and a higher salary level.
The final rule permits employers to count nondiscretionary bonuses and incentive payments (including commissions), that are paid at least annually, to satisfy up to 10% of the standard salary level.
It goes into effect on January 1, 2020.
It is important for employers to understand that satisfying the salary basis and salary threshold is not enough, standing alone, to classify an employee as exempt from overtime. An employer must also confirm any employee classified as “exempt” satisfies the applicable duties test under the EAP exemption.
The business attorneys at Blasingame, Burch, Garrard & Ashley are well-versed in federal and state labor laws, including the FLSA, and have performed audits for clients to ensure compliance with the FLSA and reduce employers’ potential exposure to financial penalties.