The U.S. Department of Labor announced today that an estimated 1.3 million workers will soon be eligible to receive overtime or be in line for a raise. Effective January 1, 2020, the minimum salary threshold for the “white-collar” exemptions under the Fair Labor Standards Act will be $684 per week or $35,568 per year, an increase from $455 per week and $23,660 per year. This rule comes more than three years after a similar rule was proposed by the Obama administration, but which raised the salary threshold significantly higher to $913 per week and $47,476 per year and ultimately was blocked by a federal court.

What Happened?

After the Obama rule was blocked, the Trump administration engaged in a prolonged rulemaking process to develop the current rule. Employers and other stakeholders weighed in, often with strong feedback that the Obama threshold was simply too high. Responding to those and other concerns, the current administration issued this new rule providing a smaller increase. The new rule also:

• Raises the total annual compensation level for “highly compensated employees” from the currently enforced level of $100,000 to $107,432 per year; and
• Allows 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.

Importantly, the new rule does not change the “duties” tests under the “white collar” exemptions (for example, to meet the executive duties test, the employee must supervise at least two other full-time workers, exercise independent judgment on significant matters, have authority to hire and fire, etc.). The new rule also does not come with an automatic update to the salary threshold, unlike the 2016 proposal.

What Should Employers Do Now?

With an impending January 1, 2020 effective date, employers should not delay in reviewing their workforce classifications before year-end to determine whether any employees currently categorized as an exempt executive, administrative, or professional employee are paid less than $684 per week or $35,568 per year. (It also presents an opportunity to double-check that employees also meet the requisite duties test.) If so, employers need to begin preparations to either bump those individuals’ salaries to comply with the new thresholds or pay them overtime as appropriate. Budgetary, employee morale, and other considerations will factor into this decision. If employees are re-classified to non-exempt status, then other changes will follow, such as the requirement that employees track their time worked as well as the employer managing or limiting potential overtime to be worked.