Last week, the U.S. Department of Labor issued a long-awaited final rule updating the compensation requirements for the FLSA’s executive, administrative, and professional exemptions. You can view the Department’s memo here. The 2019 Final Rule goes into effect January 1, 2020. Let’s discuss the important changes and what steps employers should consider moving forward.

A Brief Overview

Generally, the FLSA exempts most executive, administrative and professional employees from overtime so long as the employees satisfy three tests: (1) the duties test; (2) the salary basis test; and (3) the salary level test.

The current rule, promulgated in 2004, has been in place despite the issuance of a 2016 Final Rule. The 2016 Final Rule would have increased the salary requirement to $913 per week ($47,476 per year); raised the highly compensated employee threshold to $134,004 per year; and provided for automatic updates to these levels every three years without further notice-and-comment rulemaking.

I say “would have” because the 2016 Final Rule never saw the light of day. It was hotly contested and ultimately enjoined in November 2016. Since the injunction, the 2016 Final Rule lingered on appeal until the appeal was stayed pending further rulemaking by DOL. The 2019 Final Rule also strikes the final blow to the 2016 Final Rule by formally rescinding it. Thus, even if a judge enjoins or invalidates the 2019 Final Rule, the regulations would simply revert to their 2004 version.

The New Rule

Key changes to the 2019 Final Rule include:

  • The new minimum salary for the exemption has increased from $455 per week ($23,660 annually) to $684 per week ($35,568 annually).
  • The new minimum annual compensation threshold for the highly compensated employee will increase from $100,000 to $107,432. Of this amount $684 per week must be paid on a salary or fee basis.
  • The new rule allows employers to use commissions, non-discretionary bonuses, and other incentive compensation to satisfy up to 10% of the salary requirement so long as the payments occur annually. These payments are also subject to a single “catch-up” payment within one pay period of the close of the year.

The 2019 Final Rule also sets specials rates applicable in only certain situations:

  • The minimum salary for workers in Puerto Rico, Guam, the Virgin Islands, and the Commonwealth of North Mariana Islands minimum is set to $455 per week.
  • For workers in American Samoa the minimum shall be $380 per week.
  • Workers in the motion picture industry must be paid a minimum of $1,043 per week.

The 2019 Final Rule does not change the duties test. Moreover, the rule fails to include any provision for automatic adjustment in the future. Instead, the DOL has stated it will revisit the minimum salary and compensation levels periodically. DOL estimates 1.2 million employees that would have previously been considered exempt will now be eligible for overtime.

Next Steps

January 1, 2020 is right around the corner so the time to plan for the new rules is now. Employers should start identifying all employees who earn below the new thresholds but were previously exempt. The employers should then decide whether the reclassify those workers or raise their pay over the new minimums.

Employers electing to increase employee pay should still apply the duties test to make sure the workers qualify for the exception (its never a bad idea to audit employee classification).

Employers who choose to reclassify the employees should ensure they have sufficient funds available to pay overtime or, in the alternative, shift the extra work elsewhere.Employers engaging in reclassification of workers will also need to make sure to properly train employees on timekeeping. This choice may also require an amendment to the employer’s current policies or contracts.

Finally, employers reclassifying employees must be mindful of the impact such changes will have on employee morale and retention. Employees attach intrinsic value to being exempt so employers should be very careful when making changes to employee classifications and consider how the reclassification will influence the workforce.

If you need guidance on complying with the new regulations or want legal assistance, please feel free to contact our office; we’re here for you.

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This blog is provided by The Law Firm of Alejandro Pérez, PLC and its affiliates for educational and informational purposes only.  It is not intended, nor should it be construed, as legal advice. To speak with an attorney, please contact our office at 602.354.2833.