The Department of Labor (DOL) issued the final overtime rule, effective January 1, 2020, concluding a process that began back in March when the DOL released the proposed rules [DOL News Release No. 19-1715-NAT, 9/24/19].
Currently, to qualify for the overtime exemption under the Fair Labor Standards Act (FLSA), an employee must be: (1) “employed in a bona fide executive, administrative, or professional (EAP) capacity,” (2) salaried; (3) paid more than the standard salary level threshold; and (4) satisfy a duties test.
After a federal district court judge blocked a 2016 Obama-era DOL final rule that increased the salary level threshold from $455 per week to $913 per week, the DOL decided to reevaluate the rules and conducted a number of public listening sessions. The proposed rules received over 116,000 comments.
Standard Salary Level Increased
Beginning January 1, 2020, the standard salary level test threshold for an EAP employee increases from $455 per week to $684 per week ($35,568 annually). This is a slight increase from the previously projected figure of $679 per week ($35,308 annually).
Under an employment arrangement, an exempt employee may receive additional compensation without losing exempt status or violating the salary basis requirement. Additionally, the exempt earnings may be computed on an hourly, daily or shift basis if the employee is guaranteed a minimum weekly amount regardless of the number of hours worked.
Example: Mark is guaranteed a salary of at least $725 per week in any week work is performed. He generally works four to five shifts each week. The employer pays Mark $210 per shift. Last week, Mark worked only three shifts but was paid $725 for the week. This arrangement does not violate the $684-per-week salary basis requirement due to the minimum guarantee of $725 per week.
The exemption may also apply if a fee payment meets the standard salary level test if the employee were to work a 40-hour week.
Example: An artist is paid $350 for illustrations for a marketing campaign. The illustrations took 20 hours to complete.
- Determine the hourly rate based on the fee.
- $350 ÷ 20 hours = $17.50 per hour
- Determine the weekly amount if the artist worked 40 hours.
- 40 hours x $17.50 per hour = $700
Because the artist would have earned $700 for 40 hours worked, the artist meets the $684 standard salary level test on a fee basis.
Highly Compensated Employee Total Annual Compensation Level Increased
Beginning Jan. 1, 2020, the highly compensated employee (HCE) total annual compensation level increases from $100,000 to $107,432 for employees that meet the EAP capacity. This is a significant decrease from the initially proposed figure of $147,414. The DOL has set the HCE limit based on the 80th percentile of full-time salaried workers nationally. The proposed rules had based the figure on the 90th percentile.
In addition to the total compensation level requirement, for an HCE to be exempt:
- The employee’s primary duty must include performing office or non-manual work; and
- The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee.
Nondiscretionary Bonuses and Incentive Payments Permitted to Satisfy Salary Requirements
Nondiscretionary bonuses and incentive payments (including commissions) may satisfy up to 10% of the standard salary level test if the bonuses and payments are paid at least annually. For 2020, the 10% maximum is $3,556.80 ($35,568 per year x 10%) and to qualify for the EAP exemption, the employee must meet 90% of the salary level, $616 per week. Payments may include nondiscretionary incentive bonuses tied to productivity and profitability. Employers are permitted to make a catch-up payment one payroll period after the 52-week period if the employee does not receive enough in nondiscretionary bonuses and incentive payments to remain exempt. If a catch-up payment is not made, the employee is entitled to overtime pay for overtime hours worked in the prior 52-week period.
For HCEs, nondiscretionary bonuses and incentive payments may be counted toward the HCE annual compensation requirement, but employers may not credit these payments toward the standard salary requirement of at least $684 per week. Under the final rules, employers are permitted to make a catch-up payment one payroll period after the 52-week period or within one month after the end of the 52-week period if the employee does not receive enough in nondiscretionary bonuses and incentive payments to remain an HCE
Example: Jill earned a base salary of $90,000 for a 52-week period from Jan. 1, 2020 to Dec. 31, 2020. Her employer anticipated that Jill would earn $17,432 in commissions based on prior sales. However, due to poor sales in the final quarter of the year, Jill only earned $12,000 in commissions. In this situation, the employer may within one month after the end of the year make a payment of at least $5,432 to the employee ($17,432 – $12,000), thus satisfying the total annual compensation level of a highly compensated employee. Any such final payment made after the end of the 52-week period may count only toward the prior year’s total annual compensation and not toward the total annual compensation in the year it was paid. If the employer fails to make such a payment, the employee does not qualify as a highly compensated employee but may still qualify as exempt under the EAP exemption.
Other Increases from the Final Overtime Rule
Beginning Jan. 1, 2020:
Computer professionals. Computer professionals must earn at least $684 per week ($35,568 per year) or at least $27.63 per hour. 10% of the salary level ($68 per week) may be satisfied with nondiscretionary bonuses or incentive payments.
Special salary test for the motion picture industry. Under the proposed rules, the motion picture industry is permitted to exempt employees who are paid $1,043 per week (currently, $695 per week) so long as they meet the duties test for the exemption.
Future Updates to Earnings Thresholds
Originally, the DOL proposed to update the standard salary level and the HCE total compensation threshold every four years through a notice of public rulemaking (NPRM) followed by notice-and-comment rulemaking. The DOL agreed with commenters that updates should be based on economic conditions, rather than fixed timelines.” The DOL reaffirmed its commitment in the final rule to update EAP exemptions “from time to time” as instructed by Congress.
The DOL estimates that 1.2 million additional workers will be entitled to minimum wage and overtime pay because of the increased standard salary level. Also, an additional 101,800 workers are estimated to be entitled to overtime with the increase of the annual HCE threshold.