Wage and Hour Update

There have been many significant changes going on at the U.S. Department of Labor (“DOL”).  Two of these changes are proposed new rules:

  • On March 7, the DOL announced a long-awaited proposed rule increasing the minimum annual salary for exempt employees to $35,308 ($679/week), which would convert more than one million U.S. employees from exempt to non-exempt employees, thus making them eligible for overtime pay;
  • On March 28, the DOL announced another proposed rule that would update (for the first time in 50 years) the calculation of an employee’s “regular rate of pay” used to calculate overtime.

The DOL is also undergoing some administrative changes:

  • On July 12, Alexander Acosta unexpectedly announced his resignation as the U.S. Secretary of Labor amid controversy surrounding his involvement in a plea deal he brokered for accused sex trafficker Jeffrey Epstein.
  • Patrick Pizzella stepped in as Acting Secretary of Labor effective July 20. Reports indicate that he is more aggressive than Acosta and that the above-mentioned proposed rules will be pushed through by the end of this year or in the first quarter of 2020.
  • On July 18, President Trump announced his plans to nominate Eugene Scalia, son of the late U.S. Supreme Court Justice Antonin Scalia, to take over the Department.

This article discusses the two proposed rules increasing the salary level thresholds for determining an exempt employee and updating the regular rate of pay calculation.

Increases to Salary Level Thresholds

Current Law

The Fair Labor Standards Act (“FLSA”) requires that employees who work more than 40 hours per week must be paid overtime unless they qualify for an exemption by meeting each of the following three tests:

  1. Salary Basis Test: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed;
  2. Salary Level Test: The amount of salary paid must meet a minimum specified amount; and
  3. Duties Test: The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

Salary Level Test.  Currently, employees with a salary of at least $455 per week ($23,660 annually) satisfy the salary level test.  This salary level, however, was set 15 years ago.  In 2016, the Obama administration proposed to increase the salary level to $955 per week ($47,476 annually), but that attempt was blocked by a judge in 2017 in a decision that remains on appeal.

Highly Compensated Employees.  The DOL’s regulations also contain an exemption for “highly-compensated” employees who are currently defined as receiving total annual compensation of at least $100,000.

  • “Total annual compensation” includes commissions and nondiscretionary bonuses or incentives. It does not include board or lodging, insurance coverage, or contributions to retirement plans.
  • In addition, to qualify as a highly compensated employee:
    1. The employee’s primary duty must include performing office or non-manual work; and
    2. The employee must customarily and regularly perform at least one of the duties of an executive, administrative, or professional exempt employee.
      • According to a recent DOL opinion letter, an employee only needs to perform one exempt duty “more than occasionally.” An exempt duty is “more than occasional if it is performed normally and recurrently every workweek, but not if it is an isolated or one-time task.”
  • An employer must identify a 52-week period to measure total annual compensation. It can be the employee’s anniversary date, calendar year, or any other period.  If no 52-week period is identified, the calendar year applies.
  • Catch-up payments. If an employee’s total annual compensation does not reach the required annual compensation at the end of the 52-week period, the employer can make a “catch-up” payment within one month after the end of the 52-week period to bring an employee’s compensation up to the required level.

Key Points of the Proposed New Rule

  • The threshold salary level would increase from $455 per week to $679 per week (equivalent to $35,308 per year).
    • The proposed rule updates the salary level to reflect growth in wages and salaries over the past 15 years.
    • $679/week is equivalent to $16.98 per hour.
    • The increase is based on the 20th percentile annual salary for the lowest U.S. Census region (South).
  • To reach the minimum annual compensation of $35,308, up to 10% of the salary amount ($3,530.80) may consist of nondiscretionary bonuses, incentives, or commission payments that are paid annually or more frequently.
  • Catch-up payments would be permitted within one pay period after the end of each 52-week period to bring an employee’s compensation up to the required level.
    • An employee’s weekly pay must be no less than 90% of the minimum weekly pay of  $679 per week (i.e., weekly pay must be at least $611.10), and the remaining 10% ($3,530.90) must be paid to the employee no later than one pay period after 52 weeks of work.
  • Highly Compensated Employees.  The proposed rule also increases the threshold for defining highly compensated employees from $100,000 to $147,414 per year.  Highly compensated employees must be paid at least $679 per week, and the remaining $112,106 ($147,414-$35,308) may be in bonuses, incentive pay, and commissions.
  • The DOL also proposed periodic review to update the salary thresholds through new rulemaking every four years (as opposed to the automatic increase proposed by the Obama administration).
  • If finalized as proposed, the DOL estimates that approximately 1.1 million currently exempt U.S. employees would, without some intervening action by their employers, become non-exempt, thus qualifying for overtime pay.
  • The DOL is not proposing any change to the duties test.

How Should Employers Prepare?

Although there is still no official effective date, the period for public commenting has closed, and it appears that the proposed changes will take effect in January 2020, which is not that far off.  Employers should be evaluating job positions and compensation to determine whether they should increase salaries to the minimum level to avoid the possibility of an overtime obligation or convert currently exempt employees to non-exempt status.

  • Salary Adjustments
    • For employees close to the $35,308 threshold, the simple answer may be to just increase their salaries to maintain their exempt status, assuming they qualify under the duties test (see HEC’s resources to help you determine whether an employee would pass the duties test).
    • For employees far below the threshold, however, the answer is not so simple. Employers should evaluate whether those individuals work more than 40 hours a week such that receiving overtime as a non-exempt employee might result in the employee making more than the $35,308 threshold.
  • Converting to Non-Exempt. Employees who either do not pass the duties test, or for whom raising their pay to $35,308 is not feasible, will need to be converted to non-exempt status.  Keep in mind the morale issues that may likely accompany a conversion from exempt to non-exempt status, and think carefully about how you will communicate these changes with your employees.
  • Communication Obligations. Employers are also reminded about their obligations under HRS § 388-7, which requires an employer to “notify each employee in writing or through a posted notice maintained in a place accessible to employees of any changes in the [rate of pay, and of the day, hour, and place of payment] prior to the time of the change.”
  • Staffing Changes. Another possibility is to consider hiring more part-time staff to avoid employees working overtime.   There are, however, downsides to this option, to the extent that you may end up paying more for benefits and insurance, not to mention the logistical issues of space and supervision.
  • Policy and Practice Review. Employers should review their policies and processes that may be affected by the proposed changes, including those related to:
    • timekeeping
    • payroll changes
    • controlling overtime
    • compensation plans
  • Training. Employers should be prepared to train the reclassified employees and their managers about:
    • Wage and hour policies, including
      • off-the-clock work
      • meal and rest breaks
      • travel time
      • mobile devices
    • Timekeeping procedures
    • Activities that constitute compensable work
    • Exempt vs. non-exempt duties

There are many possibilities for how employers can handle the impending change.  The key is not to wait until the last minute to determine your strategy.

Regular Rate Calculation

Current Law

The FLSA requires employers to pay non-exempt employees overtime pay of at least one and one-half times their “regular rate of pay” for hours worked in excess of 40 hours per workweek.  Generally, an employee’s regular rate of pay for overtime purposes is calculated by dividing the total remuneration (not including overtime payments) the employee received for a workweek by the number of hours worked.  29 CFR 778.100.  DOL regulations specify what types of additional compensation must be included or excluded when calculating the regular rate of pay for purposes of determining overtime rates.

Included Compensation.  The following types of remuneration MUST be factored into an employee’s total remuneration to calculate regular rate of pay:

  • Non-discretionary bonuses, awards, or prizes (e.g., periodic bonuses based on performance or production, safety awards, attendance bonuses, retention or longevity bonuses)
  • Hazard pay, shift differentials, and similar payments
  • Premiums for foregoing meals or breaks, for undesirable assignments, and similar payments

Exclusions from Regular Rate.  There are currently nine categories of remuneration given to employees that are excluded from an employee’s total remuneration and thus, do not affect the regular rate calculation:

  1. Gifts, such as Christmas, birthday, or retirement gifts not based on hours worked, production, efficiency, etc.
  2. Paid time off (vacation, sick, holiday, etc.)
  3. Reasonable reimbursement of travel expenses, and other “similar payments . . . not made as compensation for his hours of employment”
  4. Discretionary bonuses and bona-fide employee profit sharing plans
  5. Employer contributions to an employee benefit plan (e.g., pension, 401(k), health insurance, or group life insurance)
  6. Premium pay for work in excess of 8 hours per day or 40 hours per week, or in excess of the employee’s “normal” work hours
  7. Premium pay for work on weekends and holidays
  8. Premium pay for specific work under a collective bargaining agreement
  9. Income from employer stock options, or bona fide employee stock purchase plans

Calculating Regular Rate – An Example

In order to calculate how much overtime is owed to an employee, an employer must first calculate that individual’s regular rate of pay for hours worked during that week.  The regular rate is calculated by adding an employee’s total compensation for that workweek (minus the exceptions discussed above), and dividing that sum by the number of hours worked.  This figure constitutes the employee’s “regular rate of pay.”

Example:  Joe worked 50 hours last week.  He also received a commission in the amount of $30 and a $20 gift card for his birthday.  His straight time rate of pay is $15 per hour.

  1. Straight time weekly compensation is calculated by multiplying the total number of hours worked by the straight time rate and then adding in any other included compensation.
    • 50 hours x $15 per hour = $750 + $30 commission = $780 (the gift card is excluded).
  2. Regular rate of pay is calculated by dividing the straight time compensation by the total amount of hours worked during the workweek.
    • $780 / 50 hours = $15.60 per hour

Calculating Overtime – Example Continued

After calculating Joe’s regular rate, there are two generally accepted ways to calculate his overtime pay, both of which will result in the same total pay owed to Joe.

  • Method 1: To calculate the overtime premium (equal to an additional .5 of the regular rate of pay), multiply the employee’s regular rate of pay by 1/2. The total compensation owed that week is calculated by adding the amount of overtime pay that is owed to the weekly earnings.
    1. Overtime premium owed per hour of work above 40 hours is calculated by multiplying the regular rate by one-half.
      • $15.60 x 1/2 = $7.80
    2. Overtime pay is calculated by multiplying the overtime premium by the number of hours worked above 40. 
      • 10 hours x $7.80 = $78.00
    3. Totally pay owed is calculated by adding overtime premium to the straight time weekly compensation. 
      • $780 + $78 = $858 (plus the gift card).
  • Method 2: Alternatively, start by calculating straight time pay by multiplying the regular rate by 40 hours.  Next, calculate the overtime rate by multiplying the regular rate by 1.5.  Then, multiply the overtime rate by the number of overtime hours to get the overtime pay.  The total compensation owed that week is calculated by adding overtime pay to straight time pay.
    1. Straight time pay is calculated by multiplying 40 hours by the regular rate.
      • 40 hours x $15.60/hour = $624
    2. Overtime rate owed per hour of work over 40 hours is calculated by multiplying the regular rate by 1.5.
      • $15.60/hour x 1.5 = $23.40/overtime hour
    3. Overtime pay is calculated by multiplying the overtime rate by the number of hours worked above 40.
      • 10 hours of overtime x $23.40/hour = $234
    4. Total pay is calculated by adding straight time pay and overtime pay.
      • $624 + $234 = $858 (plus the gift card)

Proposed New Rule

In addition to the nine categories of exclusions listed above, the proposed rule adds the following nine categories of payments that employers may exclude when calculating an employee’s regular rate of pay:

  1. Payments for unused paid leave, regardless of the type of leave;
  2. Payments for time that would not otherwise qualify as “hours worked,” including bona fide meal periods (unless an agreement or established practice indicates the parties have treated the time as hours worked);
  3. The cost of providing onsite specialist treatment (such as chiropractors, massage therapists, physical therapists, mental health counselors, personal trainers);
  4. Payments for gym memberships and sports or fitness classes;
  5. Costs of wellness programs, such as health risk assessments, vaccinations, weight loss programs, and smoking cessation programs;
  6. Employee discounts on retail goods and services;
  7. Certain tuition programs, so long as training is not required for the employee’s current job;
  8. Reimbursed expenses, even if not incurred “solely” for the employer’s benefit; and
  9. Benefit plans, including accident, unemployment, and legal services.

The new rule would also:

  • Clarify that payments for employees traveling on their employer’s business are per se reasonable if they are at or beneath the maximum amounts reimbursable under the Federal Travel Regulation and satisfy other regulatory requirements;
  • Eliminate the requirement that “call-back” pay and other similar payments be “infrequent and sporadic” to be excludable from the regular rate calculation;
  • Provide examples of discretionary bonuses that are excludable from the regular rate calculation and clarify that the label given a bonus does not determine whether it is discretionary; and
  • Clarify that employers do not need a prior contract or agreement with the employee to exclude certain overtime premiums.

How Should Employers Prepare?

With the public comment period closed, it is likely the proposed changes to the calculation of the regular rate of pay will take effect by the end of this year or in January 2020.  Employers should therefore review the policies and practices that would be affected by the proposed rule, and ensure they are prepared to change and implement new policies and practices when the final rule is published.  Employers should also ensure the appropriate employees are trained about the changes to avoid overpayment of wages or other costly mistakes.

Additional Resources

Back to top

Email Sign Up


If you are a member, please login below to manage your subscription. Otherwise, click "Continue to Subscribe"


Continue to Subscribe


Fill out the fields below to receive HEC emails.

How did you hear about HEC?

I would like to receive the following:

News & Updates
Training Events Notices