On September 24, 2019, the United States Department of Labor (DOL) issued its final rule on the minimum salary threshold for exempt executive, administrative and professional employees under the Fair Labor Standards Act (FLSA). The final rule – effective January 1, 2020 – will replace the prior 2016 version which was enjoined by a federal judge in Texas just days before it was set to take effect, and which has been languishing in a federal appeals court ever since.
The so-called “white collar” exemptions – those for executive, administrative, and professional employees – are the most common exemption from the FLSA’s minimum wage and overtime requirements. To claim the exemption, three criteria must be satisfied: (1) the employee performs exempt executive, administrative, or professional “duties” as defined by the regulations; (2) the employee is paid on a “salary basis” – that is, without reference to the quality or quantity of their work; and (3) the employee is paid at least the minimum weekly salary amount established by the DOL. The final rule changes only the last of these requirements.
New Minimum Salary Threshold is $35,568 Per Year
The current salary minimum to claim these exemptions – established in 2004 – is $23,660 per year, the equivalent of $455 per week. The new minimum salary for these exemptions would raise the annual minimum salary to $35,568 per year, the equivalent to $684 per week. This is slightly higher than the amount set forth in the proposed rule issued in March.
Bonus, Incentive, and “Catch-up” Payments
The final rule has two new features relating to this salary minimum that employers can welcome. First, employers are permitted to “count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent” of the new minimum salary amount, provided that such “bonuses are paid annually or more frequently.”
Second, the final rule permits employers to make “a final ‘catch-up’ payment within one pay period after the end of each 52-week period to bring an employee’s final compensation up to the required level.” (An employer may use any 52-week period, such as a calendar year, a fiscal year, or an anniversary of the hire year.) To take advantage of this “catch-up” rule, an employer must pay exempt executive, administrative and professional employees “90 percent of the standard salary level ($611.10 per week), and if at the end of the 52 week period the salary paid” plus eligible bonuses and incentives do not satisfy the annual minimum, the employer would be required to make up the shortfall in one pay period.
This new flexibility in meeting the minimum salary requirement for these exemptions will undoubtedly be welcome by many employers, especially those whose exempt employees are entitled to certain bonuses and commission payments. But employers should be sure not to forget to “catch-up” or risk losing the ability to claim the exemption.
Highly Compensated Employee New Minimum of $107,432
Under the current version of the Highly Compensated Employee exemption, employees who earn at least $100,000, perform office or non-manual work, and “customarily and regularly perform at least one” of the exempt duties of an executive, administrative or professional employee, also are exempt from the FLSA minimum wage and overtime requirements.
The final rule raises that minimum salary for “highly compensated employees” to $107,432 per year, of which $684 must be paid weekly on a salary or fee basis. The amount in the new final rule is significantly less than the proposed rule, which would have raised the minimum salary for this exemption to $147,414 per year.
No Automatic or Quadrennial Updates
In its proposed rule, the DOL proposed updating the minimum salary levels every four years. However, although the DOL’s comments to the final rule “reaffirms its intent to update the standard salary level … more regularly in the future using notice and comment rulemaking[,]” it declined to do so either automatically or every four years as the proposed rule would have done.
Preparing for the New Rule
Now that employers know what the minimum salary requirements are for these common overtime exemptions, employers can begin evaluating which employees may be impacted and act accordingly. Employers should consider whether they want to use non-discretionary bonus and incentive payments toward exempt executive, administrative, and professional employee salaries, and if they choose to do so, should work with counsel to make sure the policy complies with the final rule’s requirements.
The St. Louis employment attorneys at McMahon Berger have been advising employers across the country on wage and hour issues for over sixty years, and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.