Effective January 1, 2020, the salary threshold for employees to be classified as exempt from the wage and overtime requirements of the federal Fair Labor Standards Act (FLSA) increases as part of new overtime regulations issued by the U.S. Department of Labor (DOL). Under the FLSA, employers must pay workers at least the minimum wage and overtime pay, unless the worker is exempt. Under the new DOL Overtime Rules to Take Effect in 2020, the minimum salary for exempt status would increase from $455 per week ($23,660 annually) to $684 per week ($35,568 annually). This means that employees who make less than $35,568 per year would be automatically eligible for overtime in the amount of one and one-half times their regular hourly rate for all hours worked in excess of 40 in a workweek.
Unless specifically exempted by the FLSA, all employees must receive overtime pay for hours worked in excess of 40 hours in a workweek at a rate of not less than 1.5 times their regular rate of pay. Under current law, in order to be eligible for the most common “white collar” overtime exemptions (executive, administrative and professional), an employee must be paid a minimum weekly salary of $455 (or $23,660 per year). In addition to receiving a minimum weekly salary, to qualify for one of the white collar exemptions, an employee must receive the same salary every single workweek regardless of the number of hours worked by the employee and the employee must primarily perform exempt executive, administrative or professional duties as defined by the DOL and courts.
New Salary Threshold Limits
Effective January 1, 2020, the following changes will go into effect:
- To qualify for one of the three white collar exemptions, an employee must earn a minimum weekly salary of $684 (or $35,568 per year). This means that most employees earning less than $684 per week must be paid overtime for all hours worked in excess of 40 in a workweek.
- The salary threshold for the “highly compensated employee” exemption will be increased from $100,000 per year to $107,432 per year.
- Employers will be able to count certain non-discretionary bonuses and incentive payments (including commissions) that are paid at least annually toward as much as 10 percent of the minimum salary threshold.
The DOL rule setting new threshold limits and exception from overtime pay requirements can be found here.
Final Rule for Calculating Overtime Pay
On December 12, 2019, the U.S. Department of Labor (DOL) filed a Final Rule clarifying the types of benefits that must be included in the “regular rate of pay.” The “regular rate of pay” is the amount of compensation on which the overtime pay rate is calculated.
On January 15, 2020, the Final Rule for calculating the regular rate goes into effect. The Final Rule lets employers leave several perks, including tuition benefits, paid leave cash-outs, and some bonuses, out of the formula used to calculate employees’ overtime pay. According to the DOL press release, this new rule “marks the first significant update to the regulations governing regular rate requirements under the Fair Labor Standards Act (“FLSA”) in over 50 years.” According to the DOL, the new rule clarifies previously issued regulations so employers can “more easily offer perks and benefits to their employees.”
New Benefits Excluded From Salary Regular Rate Calculation
The FLSA requires that non-exempt employees be paid overtime based on their regular rate, which it defines as “all remuneration for employment” divided by hours worked. However, the new rules provides additional benefits that can be excluded from the regular rate, including:
- the cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
- payments for unused paid leave, including paid sick leave or paid time off;
- payments of certain penalties required under state and local scheduling laws;
- reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit; and clarifies that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”;
- certain sign-on bonuses and certain longevity bonuses;
- the cost of office coffee and snacks to employees as gifts;
- discretionary bonuses, by clarifying that the label given a bonus does not determine whether it is discretionary and providing additional examples and;
- contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense
Additionally, the Final Rule excludes certain sign-on and longevity bonuses, as well as “discretionary bonuses,” which are those “determined at the sole discretion of the employer at or near the end of the period to which the bonus corresponds” and that are not “paid pursuant to any prior contract, agreement or promise causing the employee to expect such payments regularly.” As a result, employers may provide these benefits to non-exempt employees without including them in the regular rate calculation.
Although the Final Rule provides clarification regarding the regular rate, employers should be cautious when excluding bonus amounts from the regular rate. “Discretionary” bonuses may be excluded, but simply labelling a bonus as “discretionary” is not always sufficient to exempt it from the regular rate requirements under the FLSA. The determination as to which types of bonuses can be excluded remains very fact-specific and the standard for excluding a bonus from the regular rate remains high. Also, the rule provides that “certain” sign-on and longevity / retention bonuses may be excluded. Employers should remain thoughtful when determining whether the bonuses they provide in these circumstances may rightfully be excluded from the regular rate.
Suggestions for Employers
Initially, employers should identify all employees presently classified as exempt who are making less than the new salary threshold of $35,568 per year. Employers may need to consider raising salaries, paying overtime above salary, or converting certain salaried employees to hourly.
Employers should also be familiar with the DOL’s new Final Rule for calculating overtime pay and consider using the time period before the implementation date to conduct a review of job duties (performed by employees making a salary in excess of the salary threshold) to ensure that employees are actually performing primarily exempt duties and are properly classified as exempt. Lawsuits alleging that certain types of employees are improperly classified as exempt are costly and common across all industries.
The DOL’s new Final Rule for calculating overtime pay takes effect on January 15, 2020. The DOL’s rule raising the salary thresholds for exempt employees goes into effect on January 1, 2020. Feel free to contact the Commonwealth Counsel Group team with questions regarding this Final Rule, salary thresholds and other employment-related matters.