Salary Increase for White-Collar Overtime Exemption

The U.S. Department of Labor’s Wage and Hour Division recently adopted new regulations revising the salary limitations for exemptions from the Fair Labor Standards Act. This post will review the current requirements for exemptions as well as changes in the new rule.

What Changes in the New Rule?

The upcoming changes take effect on January 1, 2020, and primarily concern the salary threshold requirement in the white-collar exemption.

The current annual salary threshold for the white-collar exemption is $23,660 ($455 per week). The new rule raises the threshold to $35,568 ($684 per week), so many salaried employees will be eligible for overtime who were previously exempt.

The new regulations will also allow employers to use nondiscretionary bonuses and incentive payments such as commissions to satisfy up to 10% of the new salary requirement—a provision not made in the current rules.

Employers will be allowed to make a final “catch-up” payment within one pay period following the end of each 52-week period, to bring an employee’s compensation up to the required exemption level. The catch-up payment only counts towards the previous year’s salary threshold, not the year in which the payment is actually made.

Who Is Exempt?

Overtime pay is mandatory payment to non-exempt employees at one and a half times their normal hourly rate for hours worked in excess of 40 hours during a defined work week. Under current rules, hourly employees are generally entitled to overtime pay regardless of the amount of their compensation. Salaried workers must also be paid overtime, unless they are “exempt” as defined in the law and regulations.

Certain provisions of the Fair Labor Standards Act exempt certain employees from minimum wage and overtime laws. Exemptions exist for types of employment such as outside sales, some computer programming occupations, some manual labor jobs, some part-time positions, seasonal employees, certain ministers and religious workers, and teachers. However, a particularly common category of exemptions, and the one affected by this new rule, is often referred to as the “white-collar” exemption.

The white-collar exemption applies to employees whose duties are executive, administrative, or professional. For an employee to be exempt under the white-collar rule, all three of these criteria must be met:

1. The employees must be paid on a salary basis,
2. Their salary must meet the minimum threshold requirement, and
3. Their job duties must fit within the executive, administrative, or professional classifications.

Thus, salaried employees making less than the minimum annual salary threshold are generally eligible for overtime pay, even if their job description is white-collar. And even if a salaried employee earns more than the minimum threshold, if their duties are not executive, administrative, or professional as defined by the regulations, they are still eligible for overtime pay.

The new rule may also impact nonprofits and churches. It will certainly affect non-religious nonprofits, because they are not exempt from FLSA. While there is a strong legal argument that wage and hours laws do not apply to ministerial employees of churches and other religious organizations, that still leaves open the issue of defining ministerial employees. In addition, other nonministerial employees who fall within the white-collar exemption and would generally not receive overtime pay will be eligible for overtime pay if they earn less than the new threshold amount. The new rule could impact church and non-profit budgets. These organizations should review how their employees are categorized and determine the impact on the organization’s budget.

Defining the White-Collar Exemption

The new rule change does not affect the existing definitions for executive, administrative, or professional duties, which are as follows:

Executive employees:

1. Have a significant role in managing the organization,
2. Regularly direct the work of two or more employees, and
3. Have significant influence on hiring, firing, and other personnel matters.

Administrative employees:

1. Perform office or other non-manual work directly related to the organization’s operations, and
2. Exercise “discretion and independent judgment” in “significant” matters.

The second metric is of course more subjective than the first, but strong legal counsel will be able to help define it. Note that this is not intended to include administrative assistants.

Professional employees primarily perform work either:

1. Requiring advanced knowledge in a scientific field or specialized knowledge acquired by formal education, or
2. Requiring creativity, invention, imagination, originality, or talent in a “recognized field of artistic or creative endeavor.”

Intentions of the Department of Labor

The Department of Labor (DOL) has announced its intention to review the thresholds more frequently than in the past and propose changes to the salary threshold through the law’s rulemaking procedures.

The DOL is likely to issue further guidance regarding the implementation of the new rule, particularly its applicability to work weeks that begin prior to January 1, 2020 and end after it. However, in the absence of such guidance, employers would be wise to apply the new rule to the work week that includes January 1. And as always, do not hesitate to contact legal counsel with questions regarding the practical impact of the new salary threshold.

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Featured Image by Rebecca Sidebotham.