Employment Law Update

This is a reminder that the U.S. Department of Labor’s (DOL) much-anticipated final rules implementing new thresholds for the overtime exemption become effective on January 1, 2020.

The DOL claims that the new rules will extend overtime protection to 1.3 million workers who are not entitled to overtime under current law — significantly fewer than the 4.2 million employees the DOL estimated would have benefited under the rules issued by the former President Obama's administration. The Obama-era rules were enjoined by a federal court before taking effect.

What's New?

The most significant changes for employers are as follows:

• The New Salary Threshold: The DOL’s final rule raises the salary threshold under which most exempt, white-collar workers — professionals, administrative employees and executives — are entitled to overtime pay from $455 a week ($23,660 per year) to $684 a week ($35,568 per year). The new threshold is significantly less than the Obama DOL rule, which would have raised the threshold to $913 a week ($47,476 per year). The new threshold is to equal the 20th percentile of weekly earnings of full-time salaried workers in the lowest wage Census region in the United States, currently the South.
   
• Highly Compensated Employees: Under current regulations, employees making more than $100,000 annually who perform limited, exempt, white-collar duties are exempt from the requirement of overtime pay. Under the final rule, such highly compensated workers will only qualify for the exemption if they are paid a salary equal to or greater than $107,432 per year. This compensation level equals the earnings of the 80th percentile of full-time salaried workers nationally.
   
• Computer Employees: The salary threshold for the computer employee exemption will also be raised to the white-collar level of $684 a week ($35,568 per year). Alternatively, employers may pay exempt computer employees at the rate of $27.63 per hour, which is the hourly rate under the current regulations. Exempt computer employees include computer systems analysts, computer programmers, software engineers and other similarly skilled workers in the computer field.
   
• No Automatic Increases in the Salary Thresholds: The Obama DOL rule required automatic updates to the threshold every three years. Under the new rule, there will be no automatic updates, although the DOL has indicated that it intends to review the threshold “more regularly in the future.”  The threshold was last been increased 15 years ago, in 2004.
   
• Bonus and Incentive Payments and Commissions: The final rule will permit employers to count nondiscretionary bonus and incentive payments, including commissions, that are paid at least annually to satisfy up to 10% of the standard salary level. This is a more favorable outcome for employers than the Obama DOL rule, which provided that such payments would have to be made on a quarterly or more frequent basis. Most such payments will be considered “nondiscretionary” where the employer states in advance that it will make the payment if the employee fulfills specified conditions. If an employee does not earn enough nondiscretionary bonus or incentive payments in a given year (52-week period) to retain exempt status, the DOL rule will permit employers to make a “catch-up” payment. Such payments must be made within one pay period of the end of the 52-week period. The payment may be up to 10% of the total standard salary for the preceding 52-week period and may only be counted toward the prior year’s salary amount, and not toward the salary amount in the year in which it is paid.
   
• The “Duties Test”: To qualify as an exempt executive, administrative or professional employee, an employee must satisfy the so-called “duties test” in addition to being paid on a salary basis at or above the minimum salary level. To satisfy this test, an employee’s “primary” duties must involve those exempt characteristics set forth in the DOL’s regulations. The DOL made no changes to the duties test.
   
• Recordkeeping: The final rule made no change to the Fair Labor Standard Act’s recordkeeping requirements. Employers, however, must make sure to keep an accurate record of the hours worked by any workers made newly nonexempt by the rule changes, just as they are required to do for currently nonexempt employees.

What Should Employers Do Next?

Employers should review the status of all employees currently classified as exempt who make less than the new salary thresholds for white-collar, highly compensated and computer employees. Employers have a number of available options to address the changes required by the final rules with respect to these employees, including:

• Raising salaries and/or adjusting nondiscretionary bonuses or incentive payments to retain exempt status.
• Reorganizing workloads and/or adjusting schedules to avoid (or limit) nonexempt employees from working more than 40 hours in a week.
• Converting the employee to an hourly rate.
• Paying a fixed salary, which covers the straight time pay for a fluctuating number of hours per week. Under this method, overtime for more than 40 hours worked in a week is paid at 0.5 times the employee’s fluctuating regular rate. DOL regulations set forth conditions, which must be met to qualify for the fluctuating work week method.
• Setting a salary and paying overtime (at 1.5 times the regular rate) for more than 40 hours worked per week. (It may be possible to set a salary that will result in paying the employee about the same amount [for a projected number of hours] as the employee had previously been paid).

The new rules have received broad coverage from news sources and many employees expect that changes will be forthcoming. Employers may want to take advantage of this opportunity to review the status of all employees classified as exempt and to change the status of misclassified employees.

Charles R. Bacharach
(410) 576-4169 • cbacharach@gfrlaw.com

Robert C. Kellner
(410) 576-4239 • rkellner@gfrlaw.com