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Benefits

DOL Issues Final Regulations Raising Compensation Thresholds for Overtime Exemption

EBIA  

EBIA  

Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 29 CFR Part 541, 84 Fed. Reg. 51230 (Sept. 27, 2019); Fact Sheet: Final Rule to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees (Sept. 2019); FAQs: Highlights of the Final Rule on Overtime Eligibility for White Collar Employees

Final Regulations

Fact Sheet

FAQs

The DOL has finalized regulations that increase the salary thresholds used to determine whether executive, administrative, and professional employees must be paid overtime. Generally, employees covered by the federal Fair Labor Standards Act (FLSA) must be paid at a rate not less than one and one-half their regular rate of pay for hours worked in excess of 40 in a workweek. Salaried employees who primarily perform executive, administrative, or professional duties, however, are exempt. DOL regulations adopted in 2004 apply that exemption to employees who satisfy a standard duties test and are paid at least $455 per week. Those regulations also exempt certain highly compensated employees whose total compensation exceeds $100,000 per year. Regulations adopted in 2016 increasing those dollar amounts were found invalid by a federal trial court, and an appeal of that decision was suspended by the Fifth Circuit pending the issuance of new regulations. New regulations were proposed in March (see our Checkpoint article), and they have now been issued in final form.

The final regulations—which take effect on January 1, 2020—increase the minimum weekly salary under the standard salary level test to $684 per week ($35,568 per year for a full-time worker). This is a slight ($5 per week) increase over the amount in the proposed regulations. (Different weekly minimums apply in some U.S. territories and in the motion picture industry.) The final regulations also increase the highly compensated employee (HCE) salary threshold to $107,432 per year. This amount is significantly less than the proposed amount of $147,414 per year, largely because the DOL decided to base the final amount on the 80th percentile of full-time salaried workers nationally, rather than the 90th percentile. According to the DOL, the proposed higher HCE threshold would have resulted in “significant administrative burdens and compliance costs” without changing the exempt status of “the vast majority” of currently exempt HCEs. And it would have required overtime for employees who should be exempt, particularly in low-wage regions and industries. Like the proposed regulations, the final regulations allow up to 10% of the minimum weekly salary to be satisfied by annual or more frequent nondiscretionary bonuses, incentives, and commissions when applying the standard salary level test but not the HCE salary threshold. The final regulations also retain the special rule allowing the exemption threshold to be met by a year-end catch-up payment. The DOL has committed to periodic review and updating of the salary amounts, but the final regulations do not adopt any fixed schedule.

EBIA Comment: These regulations do not directly affect retirement plans, but they will increase the number of overtime-eligible workers, which may result in increased retirement plan contributions under some plans. Even if a plan excludes overtime pay when calculating contributions, the regulations may alter nondiscrimination testing results—e.g., if the number of employees with overtime pay increases, this may lower the average deferral or contribution percentages of non-highly compensated employees. Either way, employers should consider how their plans will be affected, so that any increased costs or other consequences can be addressed. For more information, see EBIA’s 401(k) Plans manual at Sections V (“Core Concepts: Definitions and Uses of Compensation”), XVIII.K (“Identifying Highly Compensated Employees (HCEs)”), and XX (“Nondiscrimination: Code § 401(a)(4) and Top-Heavy Rules”).

Contributing Editors: EBIA Staff.

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