New DOL Overtime Exemption Criteria – What’s Next for Employers?

Posted Oct. 8th 2019

By: Randolph T. Barker
Abbott Nicholson, P.C.

On September 24, 2019, the U.S. Department of Labor (“DOL”) issued its final rule amending the overtime exemption criteria by increasing the salary threshold for qualified administrative, executive, and professional employees under the Fair Labor Standards Act (“FLSA”).   Prompt action by employers is necessary to bring their payroll practices in line with the final rule, which becomes effective January 1, 2020.  To summarize the final rule’s most significant changes:
  • The salary threshold, commonly referred to as the “salary basis” test covering executive, administrative and professional employees, will increase from $23,660 ($455 per week) to $35,568 ($684 per week).
  • In addition, the total annual compensation requirement for certain “highly compensated employees” who satisfy a special duties test, will increase from $100,000 to $107,432.
  • Employers may apply commissions, nondiscretionary bonuses, and other incentive payments toward satisfaction of up to 10 percent of the salary threshold.  Employers may count these payments so long as they occur no less frequently than annually.  Employers may also make a single “catch-up” payment to employees in the first pay period of the next year, provided that certain payroll criteria are met for each employee during the year.
  • The duties tests for executive, administrative and professional exemptions have not changed.
The salary basis change amounts to a nearly 50% increase over the current threshold.  Although this adjustment is far less than the 2016 rule, which if not blocked by court action would have more than doubled the threshold at the time, many employers now enter the final quarter of the year faced with new compliance issues that present challenges to their budget and compensation structure.  Obviously, no further compliance action is required as it relates to presently-exempt employees earning more than the new salary threshold.  But those and other employees might nevertheless be impacted by the adaptation:
  • Budgetary constraints could cause employers to eliminate staff, forego pay raises or make downward salary adjustments affecting currently-exempt employees, in order to offset the expense of increasing the salaries of other employees to meet the requirements of the DOL’s final rule;
  • These same financial pressures might cause an employer to consider reclassifying selected employees to non-exempt status and set an hourly rate that in the end might expose the company to even greater payroll expenses if overtime is incurred, or unexpectedly reduce the compensation and benefits of employees affected by the status change;
  • Salary increases for higher-level managers might also be required to avoid a situation where satisfying the new threshold would place the salaries of subordinates on par with those of their supervisors.
  • From an HR perspective, a new compensation structure could harm productivity and morale among higher-level employees whose salaries are not correspondingly increased, possibly have an adverse impact on employees who are members of protected classes, and thereby present the risk of discrimination claims and/or an increase in turnover.

To illustrate the new challenges employers must face, I offer the example of an employer who would see no difficulty with giving a $568 pay increase to a salaried employee presently earning $35,000 per year in order to meet the higher salary threshold.  But to comply with that same rule, that same employer might have to give a more than $10,000 increase to a subordinate making $25,000 per year, if that subordinate is not reclassified to non-exempt status.  In that situation, the employer is likely unable to justify the substantially-higher increase to a low-level employee at the perceived expense of another, or the resulting parity in compensation.  Across a larger workforce, the costs of complying with the final rule on the one-hand, and being “fair” on the other hand, could become rather significant.

Regardless of your present circumstances, it would be prudent to view compliance with the final rule as a potentially-complex undertaking.  Adjusting your pay structures to meet the new thresholds should not only consider the company’s financial limitations, but also the potential for adverse consequences in terms of employee morale, turnover and productivity.  If you have questions concerning the final rule, including how it relates to existing state wage and hour laws, or of you need help with developing and implementing compliance measures, please contact a member of Abbott Nicholson’s labor and employment law group.