We really mean it this time…

Department of Labor issues final rules on minimum salary levels for white collar overtime exemption

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It has now been four years since we initially reported on the new rules proposed by the Department of Labor to update the minimum salary requirement for the federal white collar overtime and minimum wage exemptions. Since then, the proposed rules have bounced around between the DOL under multiple presidential administrations, the federal courts, and the public forum during public comment periods. We have been on the sidelines reporting play-by-play on the status of these rules at every turn and it appears that we may finally have some resolution! The outcome is a higher salary requirement for these exemptions, but the changes are substantially downgraded from the original rules that were proposed under the Obama administration. California employers will experience less of an overall effect as California has its separate salary requirements that are already higher than these increased federal levels (as noted below).

Under the current rules, the federal Fair Labor Standards Act exempts many white collar employees — including primarily executive, administrative and professional personnel — from federal overtime pay and minimum wage requirements if the employee is paid a minimum salary of $455 per week or $23,660 annually, and performs primarily executive, administrative or professional duties, as set forth in federal regulations. Another white collar exemption category, the “highly compensated employee,” has a less rigorous duties test and currently a minimum salary threshold of $100,000 per year.

What's Changed?

Effective January 1, 2020, the minimum salary exemption threshold will increase to $684 per week (or $35,568 per year), meaning that white collar employees who earn less than that will be subject to minimum wage and overtime pay requirements. The DOL also raised the “highly compensated employee” salary threshold to $ $107,432 per year. These salary levels were last adjusted in 2004.

Another notable change is that now nondiscretionary bonuses and incentive payments (including commissions) may be used to satisfy up to 10 percent of the minimum standard salary requirement if such payments are paid on an annual or more frequent basis. Moreover, if an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given year (52-week period) to retain their exempt status the employer may provide a "catch-up" payment within one pay period of the end of the 52-week period. This payment may be up to 10 percent of the total standard salary level for the preceding 52-week period. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.

It is noteworthy that prior versions of these updated rules provided for automatic increase adjustments to the minimum salary levels in future years. However, in the current rules these automatic increases were removed and replaced with a general statement that since fixed earning thresholds become substantially less effective over time and lengthy delays between updates are more disruptive with larger increases, the DOL intends to update the earnings thresholds more regularly in the future through notice-and-comment rulemaking.

How Will the New Rules Affect Employers?

The DOL estimates that about 1.2 million currently exempt employees would not meet the new proposed salary levels and would be entitled to overtime pay without some intervening action by employers, and that employers will experience total annualized cost increases of approximately $173.3 million per year over the first 10 years. Businesses that employ white collar exempt employees at salaries below the new threshold must reclassify those employees as nonexempt and monitor/pay overtime hours, or increase their pay to the new minimum salary.

Note that California employers should not be substantially impacted by these changes as the minimum salary threshold for the white collar exemptions under California law (which is currently $960 per week / $49,920 per year) is already higher than the federal salary threshold level for the exemptions, and these salary levels under California law will increase effective January 1, 2020 (to $1040 per week / $54,080 per year) with the increase in the state minimum wage. In any event, employers should continually assess the applicability of the white collar exemptions by identifying any exempt employees who would not meet the state and federal standards and evaluating the costs, feasibility and legality of possible adjustments. Employers are advised to watch for further updates and to consult with employment counsel to maintain compliance with applicable laws.