Following years of legal action and politicking, the federal Department of Labor (DOL) just issued new guidelines for employers seeking to avoid paying overtime.  Starting January 1, 2020, employers will need to pay white-collar Executive, Administrative, or Learned Professionals (“EAPs”) at least $684 per week ($35,568 annually).     

Under the federal Fair Labor Standards Act (FLSA) employers must pay overtime at one and a half times an employee’s regular rate of pay, unless the employee fits within an exempt category of workers.  For so-called white-collar EAPs, there is an opportunity for employers to claim they are exempt from these federal minimum wage and overtime requirements, but only if they pay the employees on a salaried basis, at a minimum salary level, and the employee performs certain required duties.  At least for EAPs, if all three criteria are not satisfied, the employee is entitled to overtime pay.

Salary Levels They Are Changing (and then some)

The major news here is the increase in salary level from $455/week (currently) to $684/week (starting January 1), but that is not the extent of the changes.  Here are all the changes employers need to know starting January 1, 2020:

• New Salary Level 

  All employers covered by the FLSA would be required to pay at least $35,568/year ($684/week) to EAP employees to claim them as exempt under federal law.

• New 10% Rule

Employers may “catch-up” on an EAP’s salary to meet the salary level test by paying the EAP in the form of a nondiscretionary bonus, incentive or commission up to ten percent of the employee’s salary. This catch-up must be paid at least annually. 

For example: ABC, Inc. pays Madison, an Administrative exempt employee, $650/week. This is $34/week ($1,768 annualized) less than the new minimum salary level of $684/week.  At the end of the year ABC, Inc. wants to ensure Madison is exempt from overtime, so it gives her a nondiscretionary bonus of $1,768, which is less than ten percent of Madison’s salary, thereby satisfying the salary level test. 

• Highly Compensated Employees

EAPs who don’t meet all the duties required of the duties test may still be exempt under a less-stringent duties test, but only if they are considered Highly Compensated Employees (HCE).  Under the HCE test, the company must pay the employee at least $100,000 on an annual basis, but starting January 1, that level jumps to $107,432. [The DOL initially proposed the HCE level to be $147,414, so, apparently, lobbying efforts to temper the increase enthusiasm paid off!]

It is worth mentioning the ten percent rule does not apply to HCEs.  However, HCEs already need only be paid at the standard salary level basis ($684/week) while the remainder of their compensation to get them to the HCE $107,432 level can be paid in nondiscretionary bonuses, commissions, and other nondiscretionary compensation.

• Future Increases

The DOL was considering whether to create an automatic increase framework, like many states have implemented for minimum wage and the Obama DOL proposed years ago, but in the end, the DOL scrapped the idea.

• No Duties Changes

The DOL decided not to propose any change to the “duties test.”  This means the duties for each of the EAP exempt categories remains the same from the 2004 regulations.  Changing the duties test would have been a big deal, but such changes do not appear on the horizon.

What Employers Need to Do Now

As it stands, these new regulations are set to take effect on January 1, 2020.  In anticipation, employers should review their compensation data for EAP employees to ensure these employees are being paid at least $684/week.  If not, a decision will need to be made whether to raise the employee up to $684/week or reclassify them as non-exempt. 

Questions?  Need assistance with these new rules?  Reach out to your Thompson Coe attorney at www.thompsoncoe.com. If you are a member of the myHRgenius legal HR hotline program or want to explore membership call (651) 389-5000 or email myhrgenius@thompsoncoe.com.   

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