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Salary thresholds for overtime pay exemption increased under final FLSA regulations

Executive Compensation|Total Rewards
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By Stephen Douglas , Laura Rickey and Lindsay Wiggins | October 10, 2019

Employers should examine the effects of the new rules on their pay practices to ensure compliance once the regulations take effect in 2020.

The Department of Labor (DOL) has issued final regulations that update the rules regarding the overtime pay exemption for executive, administrative and professional (EAP) employees under the federal Fair Labor Standards Act (FLSA).

Effective January 1, 2020, the final rules:

  • Increase the minimum salary required to qualify for the EAP overtime pay exemption from $455 to $684 per week ($35,568 per year)
  • Increase the total annual compensation requirement for certain highly compensated employees to qualify for the special overtime exemption from $100,000 to $107,432
  • Allow employers to use nondiscretionary bonuses and incentive pay, including commissions, to satisfy up to 10% of the standard salary level (bonuses can be paid annually or more frequently)
  • Revise the special salary levels for workers in the U.S. territories and in the motion picture industry
  • Do not change the job duties test
  • Do not include automatic adjustments to the salary thresholds but state that the DOL will update these amounts periodically after allowing for public comment

As background, in 2016, the DOL issued final rules increasing overtime thresholds; however, before the rules could take effect, a district court in Texas issued a nationwide injunction to stop their implementation. The Fifth Circuit Court of Appeals temporarily suspended an appeal while the DOL undertook further rulemaking on appropriate salary thresholds1, so the 2016 final rules were never implemented.

Note that the final higher salary thresholds may not affect employers in states where the thresholds already exceed the new federal levels. For example, the California salary threshold is $960 per week ($49,920 per year) and will automatically increase every January through 2022. The annual salary thresholds in New York currently range from $43,264 to $58,500, depending on location. If a state establishes a higher standard than that established under the FLSA to qualify for an overtime pay exemption, the higher standard applies in that state.

Going forward

Regardless of what steps employers have already taken in the past, they will need to examine the effects of the new thresholds and rules on their pay practices to ensure compliance once the regulations take effect in 2020.

Employers should consider taking the following steps now to prepare:

  • Determine the costs to bring all EAP employees' salaries up to the new threshold and estimate overtime costs for roles that could become nonexempt.
  • Classify jobs appropriately as exempt or nonexempt (to be eligible for exempt classification, an employee must meet the salary threshold, be paid on a salaried basis and meet the duties criteria in at least one of the exemption classification tests). Consider reviewing job duties if an employee's pay is increased to maintain exempt status.
  • Review exempt jobs in salary ranges with minimums less than the new thresholds; adjust pay, reclassify jobs or reassign employees if appropriate.
  • Confirm appropriate classification (exempt or nonexempt) for jobs based on job duties. While there was no change to the duties test, this is a good opportunity to take this action.
  • Identify and prepare for potential business operations and process changes, including timekeeping, budgeting and manager training.
  • Develop a plan to communicate the timing and implementation of these changes to employees.

1 See “Proposed regulations would increase salary thresholds for overtime pay exemption,” Insider, March 2019.

Authors

Senior Director, Retirement and Executive Compensation

Laura Rickey
Senior Director, Talent and Rewards

Lindsay Wiggins
Director, Talent and Rewards

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