New Salary Threshold for White Collar Exemption

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A special thanks to our guest contributer Mike Batts with Batts Morrison Wales & Lee (BMWL). BMWL is a CPA firm exclusively serving nonprofit organizations and their leaders across the United States.

An estimated one-million-plus salaried American workers who are currently exempt from mandatory overtime pay will no longer be exempt under new regulations issued on September 24, 2019 by the U.S. Department of Labor.  The new rule, effective January 1, 2020, changes the minimum annual salary threshold that certain employees must earn to be exempt from mandatory overtime pay under the federal Fair Labor Standards Act (FLSA).  The change represents the first update to the overtime pay rules in more than 15 years.

Overtime Pay – For Whom?

For purposes of this article, “overtime pay” refers to mandatory payment to non-exempt employees at one and one-half times their hourly rate for hours worked in excess of 40 in an employer’s defined work week.

Under current rules, employees who are paid on an hourly basis are generally entitled to overtime pay, regardless of the amount of compensation they receive.  Salaried workers must be paid overtime pay as well, unless they are “exempt” as that term is defined in the law and regulations.

A particularly common category of exemption, often referred to as the “white-collar” exemption, applies to employees whose duties are “executive,” “administrative,” or “professional,” as those terms are defined in the law and regulations.  For a salaried employee to be exempt under one of these categories, he or she must both meet the duties test associated with the particular category and also must receive compensation at least equal to the minimum threshold established by DOL regulations.

What Changes in the New Rule?

The compensation factor changes under the new regulations. The current annual salary threshold for the executive, administrative, or professional exemption is $23,660 (or $455 per week).  The new threshold is $35,568 (or $684 per week). Notably, the new regulations allow employers to use nondiscretionary bonuses and incentive payments (e.g., commissions) that are paid annually or more frequently to satisfy up to 10% of the new minimum salary level.  Current rules do not include such a provision. The new regulations also add a new option allowing an employer to make a final “catch-up” payment within one pay period following the end of each 52-week period, to bring an employee’s compensation up to the required level for exemption. In that case, however, the employer must pay the employee at least 90% of the annual salary threshold for exemption (i.e., at least $615.60 per week, including salary and 10% of permitted nondiscretionary bonuses and incentive payments) during the 52-week period. The catch-up payment counts only toward meeting the prior year’s salary exemption threshold and not toward meeting the threshold for the year in which the catch-up payment is actually made.

Effective Date of Change

The rule change is effective January 1, 2020.  Further guidance from the DOL is likely regarding the applicability of the effective date to work weeks that begin prior to January 1, 2020, and end after it.  In the absence of such guidance, it is the opinion of the author that a prudent approach would be to apply the new rule to the work week that includes January 1, 2020.

Previous Proposed Changes Not Implemented

The Department of Labor previously proposed a significantly higher salary threshold that would have become effective on December 1, 2016.  On November 22, 2016, a federal district court issued a nationwide temporary injunction halting the DOL’s implementation of the proposed change.  The court later issued a permanent injunction against implementation of that change.

Additional Background on Available Exemptions

The executive, administrative, or professional exemption applies to employees only if the following three criteria are satisfied: (a) they are paid on a salary basis (the “salary test”); (b) the salary meets the minimum threshold requirement (the “salary level test”); and (c) their job duties fit within the executive, administrative, or professional classifications (the “duties test”).

Salaried employees making less than the minimum annual salary threshold thus are generally eligible for overtime pay.  Further, the fact that an employee is salaried and earns more than the minimum threshold does not necessarily mean that the employee is exempt from overtime pay; the employee’s job duties must consist of executive, administrative, or professional duties as defined in the regulations.

The new rule change does not affect the existing definitions for executive, administrative, or professional duties.

An “executive” employee is one (a) whose primary duty is managing the organization or a significant part of it, (b) who regularly directs the work of two or more other employees, and (c) who has the authority to hire or fire other employees or whose input on personnel matters is given particular weight.

An “administrative” employee is one (a) whose primary duty is performing office or other non-manual work directly related to the organization’s operations, and (b) who exercises “discretion and independent judgment” in “significant” matters.  The first prong is relatively straightforward.  The second prong is much more subjective and fact-specific.

The “professional” employee exemption is much more straightforward.  To qualify, the employee’s primary duty must be to perform work either (a) requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (b) requiring creativity, invention, imagination, originality, or talent in a “recognized field of artistic or creative endeavor.”

In addition to the executive, administrative, and professional exemptions, other exemption categories also exist under the FLSA.  Examples include exemptions for outside sales employees; employees in computer-related occupations; and highly compensated employees.   For the “highly compensated” category, the new regulation increases the annual threshold from $100,000 to $107,432.  Definitions for each category are provided in the regulations.

Special exemptions also exist for certain ministers and religious workers, seasonal employees, and teachers, as those categories are defined in the regulations.  No salary threshold applies to these special categories of exemption.

Future Changes

Unlike in the 2016 proposed regulations which were permanently enjoined by the federal court, the new regulations do not include a mechanism for automatically updating the salary thresholds. Instead, the Department of Labor has announced its intention to review the thresholds more frequently than in the past and propose changes through typical notice-and-public-comment rulemaking procedures.

Additional guidance from the DOL, including a new “Small Entity Compliance Guide”, is available on the DOL website.  The DOL has announced its intent to issue additional implementation guidance in the days ahead.