New Overtime Rule Requires Higher Salary Threshold: Makes Over 1 Million More Workers Eligible for Overtime Pay

After much anticipation, the United States Department of Labor has issued a final overtime rule that will increase the overtime-exempt earning salary threshold under the FLSA. The rule will take effect on January 1, 2020. The DOL’s estimates indicate that the new rule will make 1.3 million American employees newly eligible for overtime pay by:

  • raising the “standard salary level”;
  • raising the total annual compensation requirement for “highly compensated employees” (HCEs);
  • allowing employers to include nondiscretionary bonuses, commissions, and other incentive payments paid at least annually to satisfy up to 10 percent of the standard salary level; and
  • revising the special salary levels for workers in U.S. territories and the motion picture industry.

The standard salary level will increase to $35,568 per year ($684 per week), which means that employees earning less than that amount will generally be eligible for overtime pay as non-exempt employees.  This represents approximately a 50% increase over the current overtime exemption threshold of $23,660 per year ($455 per week).  The total annual compensation threshold for HCEs will increase about 7% from $100,000 per year to $107,432 per year (with employers paying at least $684 weekly on a salary or fee basis).

Announced on September 24, 2019, the DOL stated that it would more regularly update the standard salary level and HCE total compensation level through notice-and-comment rulemaking every four years.  The DOL left the duties test for executive, administrative, and professional overtime exemptions unchanged.  When compared to the prior proposed rule from 2016 (which proposed an increase closer to approximately $47,000), this new final rule has been viewed by many employers as a more reasonable threshold to administer.

In light of this final rule, employers should review employee earnings and budget data and start generating financial forecasts to evaluate whether it makes more business sense to raise salaries or reclassify employees as non-exempt.  Employers who expect to reclassify employees as non-exempt will need to develop a strategy for communicating this change to the affected employees and for helping the affected employees comply with time-keeping requirements. For employers who wish to keep or reclassify employees as exempt from overtime, it is also worth reminding that they must meet both the new standard salary level and meet the duties test under the FLSA.

If your business has any questions or issues regarding this or any other matter, please do not hesitate to contact us.  This presents an excellent time for employers to revisit their FLSA classifications in general to ensure consistency throughout the workforce.  We would welcome the opportunity to help you effectively and efficiently comply with the DOL’s final rule.