Raising wages is always a hot topic as the new year approaches, but the buzz usually concerns increases in state minimum hourly wage rates. This year, making news is the minimum compensation that salaried employees must be paid to be classified as exempt from federal overtime pay requirements. The U.S. Department of Labor’s (US DOL) announcement of new salary thresholds for the so-called “white-collar” overtime exemption will require some employers to pay their salaried employees more money next year, by giving them a raise to retain their exempt status or paying them a premium for overtime.
The announcement of the new salary thresholds was not unexpected. Since 2015, the US DOL had been working to raise the minimum salary white-collar workers must be paid to account for growth in employee earnings since the earnings thresholds were last updated in 2004. The US DOL’s efforts were met with resistance and legal challenges. This year, however, the US DOL finally ruled on the new compensation thresholds. On September 24, 2019, the US DOL’s Wage and Hour Division issued a Final Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, raising the minimum salary thresholds by 50%. The Final Rule, which takes effect on January 1, 2020, means that 1.3 million more workers will soon be eligible for overtime pay.
Who is exempt?
The Fair Labor Standards Act (FLSA) requires employers to pay their nonexempt employees overtime pay in an amount that is no less than 1½ times their regular wage rate for hours worked in excess of 40 in a workweek. Salaried employees employed as bona fide executive, administrative, professional, outside sales and computer employees (EAPs) who are paid at least a specified minimum weekly wage rate are exempt from overtime pay.
To qualify for the EAP exemption, an employee must meet certain tests regarding their duties and payment for their work. An exempt employee must: (1) perform work that primarily involves executive, administrative, or professional duties, as defined by Regulations, 29 C.F.R. Part 541 (the “duties test”), (2) be paid on a salary basis (the “salary basis test”), and (3) be paid at least the required minimum weekly salary level (the “salary level test”). Certain Highly Compensated Employees (HCEs) who satisfy a duties test and receive at least a specified compensation level are also exempt.
Currently, the minimum weekly salary threshold is $455 ($23,660 annually). Beginning January 1, 2020, the required salary level for the EAP exemption increases to $684 per week ($35,568 annually). The annual compensation level for HCEs increases from $100,000 to $107,432 per year. An HCE must also receive at least the minimum salary of $684 per week, without nondiscretionary bonuses, incentive pay or commissions. Non-discretionary bonuses, incentive pay, or commissions may be counted toward the annual salary requirement of $107,432.
Nondiscretionary bonuses, incentives & “catch-up” payments
The Final Rule permits employers to use nondiscretionary bonuses, incentives and commissions to satisfy up to 10% of the required minimum salary. In addition, if an employee does not earn enough in a given year (52-week period) to retain his or her exempt status, an employer may make a single “catch-up” payment to make up for the shortfall. The catch-up payment must be made within the first pay period of the next 52-week period. The catch-up payment only counts toward the salary requirement for the previous 52-week period and not toward the salary requirement for the year in which the payment is made. The catch-up payment cannot exceed 10% of the EAP’s minimum salary requirement. The exemption is lost if the catch-up payment is untimely or exceeds 10%.
How is overtime calculated for salaried employees?
A salaried employee who does not qualify for the EAP or HCE exemption must be paid overtime pay for hours worked over 40 in a workweek. There are different methods for calculating overtime rate of pay for non-exempt salaried employees. The manner of calculating overtime pay depends on whether the weekly salary is for a fixed number of hours per week or the salary is intended to cover all hours worked and the workweek fluctuates. The US DOL’s elaws FLSA Overtime Calculator Advisor can help with these calculations.
FLSA regulations establish the minimum salary that an EAP employee must be paid to be exempt from overtime pay. The FLSA does not prevent a state from establishing higher minimum salary levels necessary to classify an employee as exempt from overtime. Employers should review the current duties and pay of any employee they would classify as overtime exempt under both federal and state law. Although employers are not required to post any information about federal overtime exemptions or new salary thresholds, they are required to post minimum wage notices for employees who lose their exempt status because of the new salary standards.