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The DOL Reveals Its Final Rule on Overtime

The DOL Reveals Its Final Rule on Overtime, Presenting New Obligations and Challenges for Employers

On September 24, 2019, the U.S. Department of Labor (“DOL”) revealed its final rule on the overtime “white collar” exemptions under the Fair Labor Standards Act.  The regulations, which are located at 20 CFR Part 541, have not been updated since 2004, when the DOL increased the minimum salary level for exemption from $150 to $455 per week and made changes to the job duties employees must perform to qualify for exemption.

The DOL has been attempting to update these regulations since 2015, when it proposed to increase the minimum salary level for exemption to $913 per week ($47,476 annualized).  That proposed rule was enjoined by a Texas federal district court in November 2016.  That injunction is now on appeal before the U.S. Court of Appeals for the Fifth Circuit, but the DOL is expected to dismiss the appeal as moot now that it has issued a final rule.

The DOL’s final rule increases the minimum salary level for exemption to $684 per week ($35,568 annualized).  Employers may pay up to 10% of that minimum level ($3,556.80) in commissions, bonuses, and other “non-discretionary incentives.”  Importantly, if payments fall short by even $1, employers will owe overtime pay to shorted employees for the entire prior year.  Under the final rule, employers will have only a single pay period for a final make-up payment to ensure exempt employees receive the full $35,568 for the year.

The final rule also increases the total annual compensation required for employees to qualify under the “highly compensated test” from $100,000 to $107,432.  This is a modest increase compared to the total annual compensation amount of $147,414 that the DOL initially proposed.  Highly compensated employees must receive the guaranteed minimum salary of $684 each week, but the remaining compensation may be in commissions, bonuses, or any other type of compensation.

The DOL had initially planned to automatically update the minimum salary and highly compensated levels in the future, but has since abandoned that plan. The DOL has, however, stated that it intends to update the levels more regularly.  Any increases to the levels will come only after the DOL publishes notice of the proposed increases and provides the public with an opportunity to comment, as required under the Administrative Procedures Act.

The final rule does not take effect until January 1, 2020.  In the meantime, employers should take proactive measures to address employees who are currently classified as exempt but make less than $35,568 in annual salary.  In order to comply with the final rule, the employer can either increase the employee’s pay to meet the salary level test or re-classify the employee as non-exempt, meaning the employee will now  be eligible to receive overtime pay for all hours worked over forty in a work week.  Employers wanting to utilize the “highly compensated” test will need to ensure that any such employees earn at least $107,432 annually.  Employers should consult with legal counsel to ensure compliance with the obligations of the final rule in advance of its effective date.

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