The Department of Labor issued, on September 24, 2019, its final rule revising the salary requirements for exemption from the Fair Labor Standards Act’s mandate to pay overtime for hours worked over 40 in a workweek. The new rule increases the salary required to meet the executive, professional and administrative exemptions to $684 per week (the equivalent of $35,568 per year). The required compensation for highly compensated employees is raised to $107,432.
Effective Date: The effective date of the new rule is January 1, 2020.
Bonus and Incentives: The new rule allows nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10 percent of the required salary. This provision applies only to the standard exemption, not the highly compensated exemption. To bring an employee up to the required level, an employer may make a final catch-up payment (not more than 10 percent of the required salary) at the end of the year. The final payment must be made within one pay period or one month of the end of the year. An employer may elect to use any 52-week period as its measuring year.
No other changes: The new rule does not change the duties tests for the exemption. It does not commit the DOL to any timetable for increasing the salary level in the future, although the DOL states that it intends to update these levels, which had not been updated since 2004, “more regularly in the future through notice-and-comment rulemaking.”
Legal Challenges: The new salary test is much lower than the rule adopted by the Obama administration in 2016, which was enjoined by a federal court in Texas. The new test may be challenged by worker advocates, but such challenges are not likely to prevail.
Impact: The new rule was set to allow most salaried exempt employees to remain exempt, but will have some impact, especially on assistant managers in retail, restaurants, non-profit and service industries, especially in rural areas. Employees paid less than the salary requirement must either be paid overtime or have their salaries raised to the required level. Raising wages may, of course, have a ripple effect to avoid wage compression. On the other hand, in some areas (California, New York City, Washington D.C.) the new salary test is not much higher than the applicable minimum wage. The hourly equivalent of $684 per week is $17.10 per hour.
Don’t forget: Under the new test, the no-docking rule will continue to apply. Subject to a number of specific exceptions, the no-docking rule requires exempt employees to receive their full salary for every week in which they perform any work. Full day absences for personal reasons may be docked. Full day absences for sickness and disability may be docked in accordance with a sick or disability leave plan, and FMLA leave may be docked.
Also, under the new test, the existing duties tests for the administrative, executive and professional exemptions will continue to apply. Each of these tests contain language, such as “primary duty” or “discretion and independent judgment” that generates disputes. Plaintiffs’ lawyers are on the lookout for possible misclassification claims.