On September 24, 2019, the Department of Labor issued an updated Final Rule on the Fair Labor Standards Act’s (FLSA) salary test threshold. Effective January 1, 2020, the Final Rule culminates over three years of activity surrounding proposed updates to the salary threshold for the FLSA’s executive, administrative, and other exemptions that eliminate an employee’s entitlement to overtime premiums. Among other items, the Final Rule:

• Sets a new salary test threshold of $684 per workweek ($35,568 per year), increased from $455 per week;
• Sets a new highly compensated employee threshold at $107,432 annually (the current 80th percentile of full-time salaried workers), increased from $100,000; and
• Allows inclusion of certain nondiscretionary bonus and incentive payments to count toward up to 10% of the salary threshold.

Importantly, the Rule does not change the FLSA’s duties tests.

The Department last updated the thresholds fifteen years ago, on April 23, 2004. A lot has changed since then, including market wages. On May 23, 2016, during President Obama’s term, the Department proposed a final rule including (1) increases to the salary threshold to $913 per workweek ($47,000 per year) and highly compensated threshold to $134,004 (the then-90th percentile of full-time salaried workers, or $147,414 inflated to January 2020); and (2) automatic, regular increases to the thresholds. A court challenge invalidated the rule on August 31, 2017. On March 22, 2019, the Department rescinded the rule, asked for public comment, and expressed its intention to update the thresholds using the same methodology it used in 2004. The methodology based the salary threshold on census data in the country’s lowest-wage region and looked at percentiles of full-time salaried earners nationally for the highly compensated threshold. The Department did not implement automatic, periodic threshold updates—an approach it had rejected in both 1970 and 2004—because the court challenge found them unlawful, and flexibility allows the Department to respond to economic conditions rather than fixed timelines.

What does this mean for employers? The Department estimates that as a result of its Final Rule:

• 1.2 million currently exempt employees will gain overtime eligibility;
• 2.2. million additional employees who meet the FLSA’s salary test but not the duties test will have their overtime eligibility strengthened because they will now fail both the salary test and the duties test; and
• 101,000+ additional employees who were exempt as highly compensated employees will now be below the new threshold and therefore non-exempt.

Employers should therefore consider reviewing their employee classifications and payroll practices, as well as how the Rule will impact their budget.

Employers should therefore consider reviewing their employee classifications and payroll practices, as well as how the Rule will impact their budget. Employers may need to decide whether to reclassify certain exempt employees as non-exempt and pay overtime premiums or give them raises to meet the new salary thresholds.