By; Mary E. O’Neal
I have been hearing that the “white collar” exemption salary level is increasing soon. Can you explain what will be required and when?
The U.S. Department of Labor (“DOL”) has issued a final rule to expand worker eligibility for overtime compensation under the Fair Labor Standards Act (“FLSA”). The new rule increases the salary thresholds required for white collar and highly compensated exemptions. It does not address the duties tests, which remain the same. Though the new salary thresholds are greater than at present, they are far less than the DOL’s rule announced back in May of 2016, the implementation of which was enjoined, nation wide; then with the election of a new President, stalled; and eventually rescinded by the DOL, until now.
The “Almost” Old Rule
Under the mid-May 2016 Obama administration rule, the salary threshold for white collar exempt employees would have increased from $455/week ($23,660 annually) to $913/week ($47,476 annually) and from $100,000 a year to $134,004 a year for highly compensated individuals.
The Final Rule
The final rule, announced on September 24, 2019, increases the earnings threshold required to exempt highly compensated employees, and executive, administrative, or professional employees (i.e., “white collar” employees), from the FLSA’s minimum wage and overtime pay requirements and allows employers to count a portion of certain bonuses and commissions towards meeting the salary level for executive, administrative, or professional employees, but not for highly compensated employees.
In particular, the DOL’s final rule makes the following key changes:
- The minimum compensation for so-called highly compensated employees has increased from $100,000 to $107,432 per year (with at least $684 being paid on a weekly basis, while the remainder of the total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation);
- The standard salary level for white collar employees has increased from $455 to $684 per week, which is equivalent to $35,568 per year; and
- Employers will now be permitted to use non-discretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to (but no greater than) 10% of the standard salary level for white collar employees.
There are two additional items of note. First, if a white collar exempt employee does not earn enough in total compensation (base salary, non-discretionary bonuses and incentive payments, including commissions) in a given 52-week period to retain their exempt status, the final rule permits employers to make a “catch-up” payment within a single pay period at the end of the 52-week period. However, the catch-up amount may not exceed 10% of the standard salary level (calculating to $3,556.80 per year, at present). If the employer chooses not to make the catch-up payment, the employee will be entitled to overtime pay for any overtime hours worked during the previous 52-week period. Overtime hours are those hours actually worked in excess of 40 in a work week. Employers therefore will be well-advised to keep track particularly of those employees who are being paid at a rate that is close to the standard salary level, as revised by the final rule, so as to avoid the possibility of having to pay overtime for the prior 52-week period.
Second, employers may not use non-discretionary bonuses and incentive payments (including commissions) to satisfy the required minimum weekly salary payment ($684) for highly compensated employees.
Finally, the DOL declined to adopt a mechanism that would automatically update the salary threshold in the future, but stated its intent to update the regulations more consistently.
The final rule takes effect January 1, 2020.
What Employers Should Do Now
Employers should act immediately, as they have only a few months to review how the new salary levels will impact their business and their employees and to implement any necessary changes.
The first step is to review the salary levels of employees who are currently classified as exempt employees but who earn less than $35,568 annually—or, if the exemption is based solely on being classified as a highly compensated employee, earn less than $107,432 annual minimum compensation. Employers will want to evaluate the comparative costs of paying those employees overtime premium pay (being time and a half the employees’ “regular rate of pay” for hours in excess of 40) or increasing the employees’ salary to the new minimum levels. Employers that are unable to increase payroll costs and raise the salary levels to those required under the new rule may need to limit the overtime hours worked by these employees.
Employers may consider several different strategies for implementing these changes:
- For employees who will be converted from exempt to non-exempt, new record-keeping requirements will apply due to the new non-exempt classification. In terms of costs, however, the threshold issue will be whether the employee in fact works overtime with any frequency. For employees who routinely work no more than 40 hours per week, the change in classification from exempt to non-exempt may have minimal impact. Employers can also consider keeping those employees as salaried employees, rather than converting them to hourly workers. Employers are permitted to pay non-exempt employees a salary for the first 40 hours of work per week, and then calculate and pay overtime for any hours over 40 in a work week based on the employee’s regular rate for that week. This approach is often preferred for non-exempt employees who infrequently work overtime. The compensation such employees receive is the same as if they were paid on an hourly basis, but it may reduce some of the morale issues that can arise when a “salaried” employee is converted to an “hourly” employee. Under this method, the employer and the employee must have a clear understanding, best put in writing, of how many hours per week the fixed salary represents. The number of hours used to set the salary can be fewer than, equal to, or greater than 40 hours in a work week. The salary can be any amount as long the amount, divided by the number of hours worked, is equal to or greater than the federal (and applicable state and/or local) minimum wage. In order to determine this rate, called the “regular hourly rate,” employers should take the salary amount and divide it by the agreed upon number of hours for which the salary is being paid. Employees being paid by this method must be paid one-and-one-half times their regular hourly rate of pay for each overtime hour worked over 40 hours in a workweek. If the employee works fewer than the agreed-upon number of hours, the employer is only required to the pay the actual number of hours worked. Here is an example of how this method of overtime pay is applied where the salary to be paid is based upon 40 hours regularly worked per week, and where the employer pays a salary for the first 40 hours worked and pays overtime for the hours worked over 40.
Ann is an HR Coordinator making $36,400 annually based on working 40 hours per week. Her weekly salary is $700 per week ($36,400/52 weeks). Her regular hourly rate is $17.50 ($700/40 hours). If Ann has an unusual week and works 45 hours, her employer will owe her an additional five hours of overtime paid at a rate of time-and-one-half ($26.25/hour). Her additional overtime owed is $131.25 plus $700 for her regular weekly salary, for a total of $831.25 for that week.
If Ann only works 35 hours in another week, she only has to be paid for the time that she worked. Her regular rate of pay is $17.50 times 35 hours for a total compensation of $612.50.
- For employees who meet the duties tests for classification as an exempt employee (which must always be the case when an employee is classified as exempt), whose salaries are close to the new salary level, and who regularly work more than 40 hours a week, it may be most cost-effective for employers to raise their salaries to the new minimum salary levels. If these employees also receive nondiscretionary bonuses as part of their compensation, those amounts must be included in the “regular rate of pay” for purposes of calculating time and a half rates for non-exempt employees, as a result of which the decision to raise salaries to the new minimum level may be even more palatable.
- If an employer decides not to increase salaries to the new minimum, which results in a significant number of employees becoming eligible for overtime, the employer can bring on additional workers or redistribute work hours across current staff to reduce the number of employees who work more than 40 hours a week. An employer is not required to permit employees to work overtime hours (i.e., more than 40), and controlling work hours is good business.
- Employers may also choose to implement measures that increase the efficiency of their workplaces to cut down on the need for overtime.
- If employers are concerned that employees who have been classified and treated as exempt (meaning they have not been paid overtime), do not meet the duties test applicable to exempt status, the new rule may present an opportunity for employers to move employees from exempt status to non-exempt status, and begin paying them overtime. Though these same employees may have wage claims against their employer for overtime they should have been paid when they were mis-classified, the re-classification from exempt to non-exempt puts an end date on the wage claim.
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