In September, the U.S. Department of Labor issued a long-awaited final rule updating the compensation requirements for the FLSA’s executive, administrative, and professional exemptions. The 2019 Final Rule is effective January 1, 2020.

How Did We Get Here?

Generally, the FLSA exempts most executive, administrative and professional employees from overtime so long as the employees satisfy three tests: (1) the duties test; (2) the salary basis test; and (3) the salary level test.

The 2004 rule has been in place despite the issuance of a 2016 Final Rule. The 2016 Final Rule would have increased the salary requirement to $913 per week ($47,476 per year); raised the highly compensated employee threshold to $134,004 per year; and provided for automatic updates to these levels every three years without further notice-and-comment rulemaking.

However, the 2016 Final Rule never saw the light of day. It was hotly contested and ultimately enjoined in November 2016. Since the injunction, the 2016 Final Rule lingered on appeal until the appeal was stayed pending further rulemaking by DOL. The 2019 Final Rule also strikes the final blow to the 2016 Final Rule by formally rescinding it. Thus, even if a judge enjoins or invalidates the 2019 Final Rule, the regulations would simply revert to their 2004 version.

The New Rule

Key changes for employers in the 2019 Final Rule include:

• The new minimum salary for the exemption has increased from $455 per week ($23,660 annually) to $684 per week ($35,568 annually).
• The new minimum annual compensation threshold for the highly compensated employee will increase from $100,000 to $107,432. Of this amount $684 per week must be paid on a salary or fee basis.
• The new rule allows employers to use commissions, non-discretionary bonuses, and other incentive compensation to satisfy up to 10% of the salary requirement so long as the payments occur annually. These payments are also subject to a single “catch-up” payment within one pay period of the close of the year.

The 2019 Final Rule also sets specials rates applicable in only certain situations:

• The minimum salary for workers in Puerto Rico, Guam, the Virgin Islands, and the Commonwealth of North Mariana Islands minimum is set to $455 per week.
• For workers in American Samoa the minimum shall be $380 per week.
• Workers in the motion picture industry must be paid a minimum of $1,043 per week.

The 2019 Final Rule does not change the duties test. Moreover, the rule fails to include any provision for automatic adjustment in the future. Instead, the DOL has stated it will revisit the minimum salary and compensation levels periodically. DOL estimates 1.2 million employees that would have previously been considered exempt will now be eligible for overtime.

Next Steps

Employers should identify all employees who earn below the new thresholds but were previously exempt. The employers should then decide whether the reclassify those workers or raise their pay over the new minimums. However, employers electing to increase employee pay still apply the duties test to make sure the workers qualify for the exception. And it is never a bad idea to audit employee classifications.

Employers who choose to reclassify the employees must apply the duties test and determine which classification that the employee is in. Employers engaging in reclassification of workers will also need to make sure to properly train employees on timekeeping. This choice may also require an amendment to the employer’s current policies, contracts and timekeeping policies.

Reclassifying employees may impact employee morale and retention. As some employees attach intrinsic value being exempt. However, employers must follow the duties test when classifying employees.

Final Note

And, if the employer is based in Arizona, the minimum wage is increasing to $12 per hour on January 1, 2020. Some Arizona cities, such as Flagstaff, the minimum wage will increase to $13 per hour effective January 1, 2020.