Final Overtime Pay Rules

Q: I read that the on-again, off-again new overtime pay rules are now final. What does my association need to know?

A: On September 24, 2019, the Department of Labor (DOL) issued a final rule under the Fair Labor Standards Act (FLSA), which increases the minimum salary levels required for overtime pay exemption (the “salary level test”) for the first time since 2004. The DOL estimates that the final rule, which takes effect on January 1, 2020, will make more than 1.3 million workers newly eligible for overtime pay. Thus, every association with employees should prepare for the change.

As a general matter, the FLSA requires covered employers to pay employees a minimum wage and, for employees who work more than 40 hours in a week, overtime premium pay at least 1.5 times their regular rate of pay. Yet, certain exemptions exist. In particular, the FLSA exempts “bona fide executive, administrative, and professional” (“white collar”) employees from the Act’s minimum wage and overtime requirements if the following conditions apply: (i) the employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (ii) the amount of salary paid meets a minimum specified amount (the “salary level test”); and (iii) the employee’s job duties primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).

The final rule increases the minimum salary level from $455/week to $684/week, the equivalent of an annual increase from $23,660 to $35,308. It also allows employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to ten percent of the standard salary level test, provided such bonuses are paid at least annually. Further, if, at the end of the annual pay period, the employee’s salary plus nondiscretionary bonuses and incentive payments (including commissions) does not equal the new standard salary level ($35,308), the employer will have one pay period to make up for the shortfall (up to ten percent of the standard salary level, or $3,530.80).

In contrast to earlier proposals, the final rule does not provide for future automatic adjustments to the salary threshold. The DOL has acknowledged, however, that “lengthy delays between updates necessitate disruptively large increases when [the] updates finally occur.” Thus, it has stated its intent, going forward, to update the earnings thresholds more regularly through notice and comment rulemaking.

The changes in the salary level test are the result of a process that began more than three years ago and has been influenced by legal challenges, a change in administration, and public comment. The DOL believes that the new earnings thresholds offer “consistency and certainty for employers as well as clarity and prosperity for American workers.”

It is important to note that the final rule does not amend the third component of the exemption, i.e., the requirements of the “duties test.” Under the duties test, an employee who earns more than the minimum salary level is exempt from the overtime pay requirements if he or she: (i) has a primary duty to perform office work relating to the management of the enterprise, department or subdivision where he/she is employed; (ii) customarily and regularly dictates the work of two or more other employees; (iii) has the authority to hire or fire other employees, or to make meaningful suggestions and recommendations as to the hiring, firing and advancement of other employees; and (iv) has duties that include the exercise of discretion and independent judgment with respect to matters of significance.

The FLSA’s minimum wage and hour standards do not prevent individual states from establishing their own, more protective standards. Thus, associations must determine whether the federal, or a state’s, overtime exemption thresholds apply to their employees. If a state has a more protective (i.e., higher) overtime exemption threshold in place than that set by the FLSA, the higher standard applies to employees in that state.

In addition to increasing the minimum salary level, the final rule also increases the annual salary level necessary to qualify as a “highly compensated employee” (HCE) from $100,000 to $107,432. The increase is substantially less than the proposed level of $147,414, likely as a result of public comments. Under the HCE test, office employees who meet the requirements of the salary basis and salary level tests and receive at least $107,432 annually are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one (not all) of the exempt duties or responsibilities spelled out under the duties test.

The HCE test is based on the rationale that it is unnecessary to apply the full standard duties test to employees who earn the HCE salary amount because such employees “have almost invariably been found to meet all the other requirements of the regulations for exemption.” Thus, the HCE test combines a high compensation requirement with a less-stringent, more-flexible duties test. The DOL estimates that an additional 101,800 currently exempt workers could become eligible for overtime under the new increased HCE threshold.

As associations head into 2020, they need to consider the potential effects of the increased salary thresholds on staffing. Not only must they make sure that they are properly classifying employees as exempt or non-exempt, but they also must budget for any likely increases in overtime pay. And, with respect to those “white collar” employees whose annual compensation is close to the exemption threshold, association employers should assess whether modest increases in salary or potential overtime payment obligations make better economic sense for the organization.

The answers provided here should not be construed as legal advice or a legal opinion. Consult a lawyer concerning your specific situation or legal questions.