We have been actively following the Department of Labor’s changes to the rules regarding overtime minimum salary levels and other regulations under the Fair Labor Standards Act (FLSA). The rules that were first proposed in 2016 would have increased the exemption for employees that meet the definition of “white collar” from a rate of $23,600/year (or $455/week) to $47,476/year (or $913/week). After implementation of these changes was blocked by a District Judge in the Eastern District of Texas and the current administration’s decision to not litigate the underlying injunction, it was unclear what, if any, changes would be made to the minimum salary levels and other regulations under the FLSA.
Early on, the current administration signaled that a revised proposed rule would be issued. We have been waiting since then, but the wait is over: On September 24, 2019, the Department of Labor published its final rules. These rules become effective January 1, 2020.
While scaled back from the original 2016 proposal, the new rules have important implications for Illinois employers and employees alike.
As a general proposition, employers subject to the Fair Labor Standards Act must provide minimum wage and overtime regardless of salary unless the employee is deemed to be “white collar” or high income. In other words, an employee is entitled to overtime regardless of his or her salary unless the employee falls meets the definition of “white collar” or high income.
This general rule hasn’t changed. What has changed is the definition of “white collar”.
The new rule raises the “standard salary level” to qualify an employee as “white collar” from the $455 per week to $684 per week and $23,600/year to $35,568/year. The “white collar” exemption applies to employees who are bona fide executive, administrative, outside sales or professionals (section 13(a)(1)) and certain computer employees (Section 13(a)(1) and Section 13(a)(17)), but only if they meet the salary level test.
The Department uses three tests to determine whether an employee is “white collar” and, therefore, exempt from overtime: 1) the Salary Level Test; 2) the Salary Basis Test; and 3) the Duties Test. The Salary Level Test requires that the employee be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
The new rule provides that, effective January 1, 2020, this amount will be a minimum of $684/week or $35,568 annually.
The Salary Basis Test, which also must be meet for the exemption to apply, provides that the salary must make up a specified minimum amount of the employee’s compensation level. In other words, a certain percentage of the employee’s compensation must come directly from salary and not from bonuses or other incentives.
The Duties Test also must be met for the exemption to apply. The Duties Test requires that the primary duties of an employee must be exempt (executive, administrative, outside sales or professional, or certain computer orientated responsibilities, for the employee to qualify as exempt. (Note that the Salary Level Test and Salary Basis Test do not apply to doctors, lawyers, teachers or those in outside sales.)
The new rule also raises the total annual compensation requirement for employees deemed “highly compensated” from the current $100,000 per year to $107,432 per year. One change from the proposed 2016 rule is also in the new rule. Employers may use non-discretionary bonuses and incentive payments (e.g. commissions) to satisfy up to ten percent (10%) of the standard salary level and not violate the salary basis test.
For example, employers may use non-discretionary incentive bonuses tied to productivity and profitability. For employers to credit non-discretionary bonuses and incentive payments toward a portion of the standard salary level test, the Final Rule requires those payments to be paid on a quarterly or more frequent basis. Employers are also allowed to make a “catch-up” payment so long as it is made in the applicable 52-week period.
Some employees who are exempt as of December 31, 2019, will become non-exempt on January 1, 2020 because of this rule change. This is where the rubber will meet the road. Employers will have to pay begin paying overtime after eight (8) hours a day and/or forty (40) hours per work week for these employees, in addition to the salaries they now pay. Employers may respond by raising salaries to maintain the exemption for certain employees. Employers also might reorganize workloads or adjust schedules to avoid the new overtime requirements.
Penalties for a violation of the Fair Labor Standards Act can be severe. Therefore, employers must adjust or face the potential of costly repercussions. Employers who are unclear on these new rule changes should seek legal counsel as soon as possible and begin planning before the rule change takes effect in January of next year.