Client Alert: It’s About (Over)time – New U.S. DOL Rule Raises Minimum Salary for Exempt Employees

Effective January 1, 2020: Exempt employees that earn less than $35,568 per year will be entitled to overtime under the new U.S. Department of Labor (“DOL”) “overtime rule.”

In early November 2019, the U.S. Department of Labor (DOL) released its changes to the overtime provisions of the Fair Labor Standards Act (FLSA). This new “overtime rule” is an increase in the minimum salary an employee must earn in order to qualify as exempt from the overtime and other protections of the FLSA. The rule goes into effect on January 1, 2020.

More specifically, the rule:

  • Raises the salary level from $455 per week to $684 per week;
  • Raises the total annual compensation level for highly-compensated employees from $100,000 per year to $107,432 per year; and
  • Allows employers to use non-discretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10% of the salary level.

The rule also changes the special salary levels for workers in U.S. territories and in the motion picture industry.

The DOL previously implemented a rule to raise the exempt salary threshold under the Obama administration. That 2016 rule, which was ultimately blocked by a federal judge, would have more than doubled the threshold base salary for exemptions, and required automatic increases. Although this new rule does not include automatic adjustments, the DOL has confirmed its intent to update the earnings thresholds more regularly, reasoning that “fixed earning thresholds become substantially less effective over time.” The DOL estimates that the new rule will prompt employers nationwide to either reclassify or increase the salary of over 1 million workers.

This rule does not make any changes to the duties test. To qualify as an exempt executive, administrator, or professional, employees still must perform certain duties in addition to receiving pay on a salaried basis that meets the new minimum rate. Notably, the Washington State Department of Labor and Industries (L&I) anticipates that it will issue its own rules updating both the minimum salary threshold and the “duties test” sometime in early December 2019. The new rules specific to Washington State are likely to raise the salary threshold above the federal minimum and bring the duties test in closer alignment with the federal rules.

Key Takeway: Misclassification of employees as exempt can lead to significant liability. To ensure compliance, seek advice from your employment counsel.