As previously announced, on September 24, the U.S. Department of Labor (“DOL”) released its long-awaited final overtime rule raising the salary threshold to $684 per week ($35,568 annually), effective January 1, 2020.  The DOL expects the new rule to make 1.3 million more workers eligible for overtime pay.

Background

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.  To qualify for an exemption, employees must be paid a fixed salary of at least the threshold amount and their job duties must involve primarily executive, administrative, or professional duties.

The salary threshold was last set 15 years ago at $455 per week.  In 2016, the Obama administration proposed to increase the salary level to $913 per week, but that attempt was blocked by a judge in 2017.  Earlier this year, the DOL announced a proposal to increase the threshold to $679 per week.

New Rule

The final rule raises the salary threshold from $455 per week ($23,660 annually) to $684 per week ($35,568 annually).  This is a slight increase over the proposed rule, which would have increased the threshold to $679 per week (equivalent to $35,308 per year).  As in the proposed rule, the new rule will allow 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.  If an employee does not earn enough in nondiscretionary bonuses and incentive payments in a given 52-week period to retain the exemption, a catch-up payment would be permitted within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level.  A catch-up payment would count only toward the prior 52-week period’s salary amount and not toward the salary amount in the 52-week period in which it was paid.

Additionally, the final rule raises the total annual compensation level for highly compensated employees (“HCE”) from $100,000 to $107,432 per year.  This is a significant decrease from the proposed rule, which would have increased the level to $147,414.  A catch-up payment would be allowed within one month after the end of the 52-week period to bring an employee's compensation up to the required level.

More information about the final rule is available on the DOL’s website, including the DOL's Fact Sheet and FAQs.

Although legal challenges are expected, employers should be evaluating job positions and compensation based on the final rule’s new salary thresholds 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.