Department of Labor Announces Final Overtime Rule, Modifies Salary Threshold for Exempt Employees (US)

On September 24, 2019, the U.S. Department of Labor (“DOL”) announced its long-awaited final overtime rule. Under the current DOL rules implementing the Fair Labor Standards Act (“FLSA”), to be exempt from overtime pay under the “white collar” exemptions (e.g., executive, administrative, professional), an employee generally must be paid a predetermined, fixed, non-fluctuating salary of $455/week. However, as we reported on March 7, earlier this spring, the DOL proposed a rule to raise the FLSA salary threshold. After thousands of public comments on the Notice of Proposed Rulemaking, the DOL announced on September 24 that it will increase the FLSA salary threshold even further than the DOL had proposed earlier this year, to $684/week, or the equivalent of $35,568/year. The methodology the DOL used to determine the salary threshold is similar to that it used in 2004 when the threshold was last updated, tying the salary level to the 20th percentile of earnings of full-time salaried workers in the retail sector within the lowest-wage census region (the U.S. south).

In calculating the annual salary threshold, employers will be permitted to include non-discretionary bonuses, incentives, and commissions to comprise up to 10% of an employee’s annual salary level, so long as such payments are made annually. The final rule also incorporates language from the proposed rule contemplating future increases to the salary threshold, but at this time the DOL has not announced a specific time frame for when the eligibility threshold will increase. The final rule makes no changes to the “primary duties” tests of the exemptions; only the salary threshold is changing.

In addition, the salary threshold for the “highly compensated employee” exemption – where an employee is paid a high salary and performs at least one exempt duty – is increasing from $100,000/year to $107,432/year, which is a more modest increase than originally was envisioned.

The news of the DOL’s final overtime rule comes on the same day as word that Eugene Scalia, President Trump’s nominee for Labor Secretary, passed a Senate Health, Education, Labor and Pensions Committee vote (passing 12-11 in favor of confirmation), advancing a step further to a final confirmation vote. A full Senate vote to confirm Scalia could occur as early as the end of this week.

The final overtime rule is scheduled to go into effect on January 1, 2020, at which time an estimated 1.3 million U.S. workers will be eligible for overtime pay unless their salaries are increased. However, the Obama administration proposed an even more aggressive increase to the salary threshold in 2016, which rule was enjoined by the U.S. District Court for the Eastern District of Texas in November 2016, later invalidated by that court, and an appeal of the decision held in abeyance pending further rulemaking. A similar court challenge to this administration’s final rule may follow; we will update the blog if the rule is challenged. In the interim, employers are advised to discuss with counsel what modifications should be made to their pay practices to anticipate the January 1, 2020 rule change.