US DEPARTMENT OF LABOR ANNOUNCES NEW RULE ON OVERTIME EXEMPTIONS

The U.S. Department of Labor announced its final rule setting a new salary threshold for the “white collar” (executive, administrative, and professional) overtime exemptions. As of January 1, 2020, employees in these categories will have to earn at least $35,468 annually ($684 per week) to be exempt from overtime requirements.  No changes were made to the duties tests for these exemptions.  An additional new provision of the rules will allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the required salary level.

Under the federal wage-hour law (the Fair Labor Standards Act or FLSA), employees must satisfy three tests to be exempt from overtime pursuant to one of the three white collar exemptions.

  1. The employee must be paid “on a salary or fee basis.” (There are limited exceptions to this aspect of the rules, for teachers, lawyers, licensed or certified medical practitioners, medical interns and residents.)
  2. The employee must be paid at least the threshold amount.
  3. Finally, the employee must perform “exempt duties,” as defined in the regulations for each of the exemptions.

During the Obama administration, the DOL proposed to raise the salary threshold from its current level of $455 per week ($23,660 annually) to nearly $50,000 per year.  The final rule issued in 2016 was enjoined by a court, which held that the DOL had exceeded its authority.  The DOL appealed, but with the change in administrations the DOL went back to the drawing board, sought additional public comment, and now has issued its new final rule – at about 70% of  the threshold amount proposed by the DOL under President Obama.

The new final rule also raises the threshold for the “highly compensated employee” (“HCE”) exemption from $100,000 to $107,432 annually.  This change will not be consequential in Connecticut, where state law doesn’t recognize the HCE exemption.  Thus, in Connecticut, even highly compensated employees are entitled to overtime when they work more than 40 hours in a workweek if they do not perform exempt duties.

Employers will need to determine whether workers who are currently classified as exempt will be exempt under the new rule — if their salaries are insufficient to meet the threshold, decisions will have to be made whether to raise their pay or reclassify them as overtime-eligible.

For employers whose compensation systems include commissions or nondiscretionary bonuses, it will be necessary to examine the new rule carefully to determine what can be counted toward the exempt salary threshold.

This is also a good time to consider whether exempt employees actually satisfy the “duties tests” for the white collar exemptions – consider whether these exempt employees actually perform exempt work, or whether they are being misclassified as exempt. Employers may find it helpful to consult legal counsel regarding employee classification issues to confirm that their exempt employees are properly classified under the law.

More information is available on the USDOL website (here).