This past Tuesday, the U.S. Department of Labor (“DOL”) issued its final rule updating the commonly referred to “white collar” exemptions to the Fair Labor Standard Act’s (“FLSA”) overtime requirements. These updates include a long-anticipated second attempt at raising the “standard salary level” threshold for the exemptions. A similar increase was published in 2016, however, it was ultimately invalidated by a District Court in Texas. Now, three years later, the DOL is issuing a broader final rule with four key provisions that will require employers to take immediate action to have their current workforce assessed for possible reclassification.
The “standard salary level” provision previously mentioned raises the threshold weekly salary from $455 (or $23,660 per year) to $684 (or $35,568 per year). In other words, for a worker to qualify for the existing “Executive, Administrative, or Professional Employee” (“EAPE”) exemption, they must receive a weekly salary no less than $684. Similarly, a second provision adjusts the annual compensation requirement to classify employees as exempt as “Highly Compensated Employees” (“HCE”). Now, in addition to satisfying the traditional HCE test, employees must receive a total annual compensation of $107,432 (up from $100,000) to be exempt from the FLSA’s overtime requirements.
Of note, but likely less of a concern, the third provision supplants the new “standard salary level” for workers in the U.S. Territories and/or in the motion picture producing industry, who will instead be subject to “special salary levels” (e.g., $380/week for American Samoa; $455/week for Puerto Rico, Virgin Islands, Guam, and Northern Mariana Islands; and $1,043/week for motion picture industry workers).
Due to these significant changes, employers face legal exposure if they fail to reassess their employees’ status for the possibility of reclassification. Where a previously exempt employee no longer meets the thresholds, employers will need to weigh the costs and benefits of adjusting the employee’s weekly and annual compensation (which may be significant compared to the expected overtime worked by the employee). However, this is where the fourth and final key provision becomes critically important. In recognition of “evolving pay practices,” the DOL will allow employers to consider “nondiscretionary bonuses and incentive payments” to satisfy up to ten (10%) percent of the standard salary level. Obviously, this may be the make-or-break factor in some reassessments.
These new provisions become effective on January 1, 2020. Employers are encouraged to take the next three months to assess their current workforce for possible reclassifications. As part of the process, employers would be wise to seek legal consultation to ensure that the non-salary requirements of the exemption are understood and well-established for each exempt employee, in order to avoid the costly results of misclassification under the FLSA.