On Tuesday, September 24, 2019, the Wage and Hour Division of the United States Department of Labor (the “Department”) issued a new Final Rule (summarized in a Fact Sheet released by the Department) to update the regulations defining and delimiting the exemptions for executive, administrative, or professional employees. According to the Department, the new regulations issued under the Fair Labor Standards Act (“FLSA”) “will allow 1.3 million workers to become newly entitled to overtime by updating the earnings thresholds necessary to exempt executive, administrative or professional employees from the FLSA’s minimum wage and overtime pay requirements.”
Key Provisions of the Final Rule
According to the Department, “the final rule updates the salary and compensation levels needed for workers to be exempt in the final rule [by]:
1. raising the “standard salary level” from the currently enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full year worker);
2. raising the total annual compensation level for “highly compensated employees (HCEs)” from the currently-enforced level of $100,000 to $107,432 per year;
3. allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices; and
4. revising the special salary levels for workers in U.S. territories and in the motion picture industry.
Additionally, the Department intends to update the standard salary and HCEs total annual compensation levels more regularly in the future through notice-and-comment rulemaking.”
HCE Total Annual Compensation Requirement
The Department also states that it “is setting the total annual compensation requirement for HCEs at $107,432 per year. This compensation level equals the earnings of the 80th percentile of full-time salaried workers nationally. To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $684 per week on a salary or fee basis (without regard to the payment of nondiscretionary bonuses and incentive payments).”
Treatment of Nondiscretionary Bonuses and Incentive Payments
According to the Fact Sheet issued by the Department, “[i]n the final rule, in recognition of evolving pay practices, the Department also permits employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, they must make such payments on an annual or more frequent basis.
If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year (52-week period) to retain his or her exempt status, the Department permits the employer to make 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.”
The Department’s Final Rule, effective January 1, 2020, will now head to the Office of the Federal Register for public comment and publication. The “final” Final Rule may differ slightly in the technical details and formatting of this rule as a result of the Office of Federal Register’s process.