Department of Labor Announces New Overtime Rule

The U.S. Department of Labor (DOL) released the finalized rule on overtime exemptions for white-collar workers under the Fair Labor Standards Act. The rule updates the standard salary levels for the first time since 2004. While the pool of nonexempt workers is expected to expand by more than one million, it is also more favorable to employers than a rule proposed by the Obama administration in 2016; that rule would have expanded the pool by more than 4 million.

The new rule is scheduled to take effect on January 1, 2020. To reduce the impact on bottom lines, affected employers should take prompt action.

Current Overtime Rule

Under the existing regulations, an employer generally can’t classify an employee as exempt from overtime obligations unless the employee satisfies three tests:

1. Salary basis test: The employee is paid a predetermined and fixed salary that isn’t subject to reduction because of variations in the quality or quantity of the work performed
2. Salary level test: The employee is paid at least $455 per week or $23,660 annually
3. Duties test: The employee primarily performs executive, administrative or professional duties

The job title or salary alone does not support an exemption — the employee’s specific job duties and earnings must also meet applicable requirements.

Depending on the exemption, the duties test specifics may vary. For example, for the executive exemption, the employee’s primary duties must be managing the organization or a department. He or she also must direct the work of at least two employees, with some influence in employee hiring and firing.

An exempt administrative employee must perform office work that is directly related to the employer or general business management, or customers. Also, he or she must exercise discretion and independent judgement on significant matters. Generally, the professional exemption can apply only if the employee’s main duty is work that requires advanced knowledge acquired by prolonged and specialized instruction and study.

Neither the salary basis nor the salary level test applies to certain employees (such as doctors, teachers and lawyers). The current rules provide a more relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $100,000 (including commissions, bonuses and other nondiscretionary compensation), or a minimum of $455 per week. In this case, the employee needs to only perform one of the primary duties required regularly for the executive, administrative or professional exemption.

Out with the Old, In with the New

The DOL’s final rule does not change the salary basis or duties tests but alters the salary level test. The standard level test threshold is raised to $684 per week, or $35,568 per year (compared to $913 and $47,476 under the 2016 rule). Thus, if an employee’s salary exceeds this level, that person will be ineligible for overtime if he or she performs primarily executive, administrative or professional duties. The employee is nonexempt if the salary falls below the level, regardless of duties.

To satisfy up to 10% of the standard salary level test, employers can use nondiscretionary bonuses and incentive payments (including commissions) paid annually or more frequently. The employer can make an additional payment within one pay period of the end of year if an employee doesn’t earn enough in such bonuses or payments in a year to remain exempt. The payment will count only toward the prior year’s salary amount, however.

The rule increases the total annual compensation requirement for HCEs to $107,432 — less than the Obama rule’s $134,004 threshold — but it could still prove difficult for small businesses to satisfy. Also, HCEs must make at least $684 per week in salary or fees. The final rule sets the total annual compensation threshold at the 80th percentile of weekly earnings for full-time salaried employees nationally, in contrast to the proposed rule which held it at the 90th percentile. The final rule also uses three years of pooled data to estimate the HCE compensation level, rather than the proposed rule’s one year.

The final rule drops the 2016’s automatic adjustments to the salary thresholds every three years, like the proposed rule. However, the DOL also opted against the proposal to consider updates every four years. The final rule, instead, simply indicates the department’s intent to update the earnings thresholds “more regularly in the future,” following the notice-and-comment rulemaking process.

Tips to Help You Prepare

Employers may feel like they are trapped in a loop, repeatedly preparing for impending changes to the overtime rules. And, it’s likely that the latest round of changes also will face court challenges. Employers should, nonetheless, begin to take measures to achieve compliance — and minimize the impact to finances — when the final rule takes effect. If you have already gone through this process you may be more prepared, but you should not rely on your past findings as circumstances may have shifted.

Check your employees’ salary levels against the new thresholds to start. It may be advisable to give reasonable raises to employees who fall under a threshold and routinely work more than 40 hours per week. Or, to prevent newly nonexempt employees from working overtime, you might want to redistribute workloads or scheduled hours.

This also is a good time to review your employees’ duties against the tests for various exemptions. Check duties on a regular basis, as this is a ripe area of litigation for employees who contend that they deserve overtime despite their job titles. Courts and the DOL agree that specific duties, not a job title or even job description, are what matter.

If you will be reclassifying current exempt workers as nonexempt, you must establish procedures for accurately tracking their time to ensure proper overtime compensation is paid. Some training on timekeeping procedures may be required for reclassified employees. They may also need some reassurance that they are not being demoted.

Plan Accordingly

Some employers may find that the new overtime rule substantially increases their compensation costs, including their payroll tax liability. To help ensure that your company is in compliance with the new rule, as well as all payroll tax obligations, contact us today.

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