The U.S. Department of Labor (DOL) has finalized long-anticipated regulations regarding workplace pay for employees exempt from overtime requirements.
The changes are expected to increase the compensation of more than one million U.S. workers who are paid at the lower end of the salary scale. Workers paid on an hourly basis are not affected by the changes.
Employers can choose to treat employees as exempt from overtime obligations, only if two criteria are met. The first is the “duties test,” meaning that an employee must primarily perform certain executive, administrative or professional duties prescribed in detail by the Department of Labor. The “duties test” is unchanged in the new regulations. Second is the “salary basis test,” meaning that an employee must be paid a fixed amount per week for all hours worked in that week.
Since 2004, employers were required to pay at least $455 per week ($23,600 per year) to meet the salary basis test. This minimum amount is being raised a full 50 percent, to $684 per week ($35,568 per year), effective January 1, 2020.
The Department of Labor estimates that 1.3 million workers are currently being paid less than $684 per week on a salary basis. For those workers, their bosses will have two options. They can raise their weekly salary to $684 per week. If they choose not to do this, they must pay them as hourly employees, which will mean the employees become eligible for overtime pay.
The new rules allow employers to use non-discretionary bonuses and incentive payments such as commissions to satisfy up to 10 percent of this minimum salary standard. In other words, an employer can pay slightly less than $684 per week, but the employer is required to make up any deficiency with a bonus or other payment at least once per year.
Why the 50% rise? That is what happens when 15 years elapses between adjustments. The DOL’s methodology analyzed inflation and earnings data since 2004 to arrive at this number. As part of the new regulations, the DOL is pledging to revisit the minimum salary on a more frequent basis in the future.
Employers have less than three months to implement the new rule. Among other things, employers should identify salaried exempt employees making at least $455 per seek but less than $684 per week. Employees will need to decide whether to keep these employees on salary and therefore increase their pay, or convert them to hourly employees and pay overtime as earned.
Employers should also use this opportunity to double-check whether their exempt employees are properly classified as exempt. Improper classification, especially with respect to certain administrative, sales and technology employees, is a common mistake that can lead to litigation, DOL audits and substantial penalties. As this is a nuanced area of the law, we recommend you consult with an experienced wage and hour attorney for assistance.