The U.S. Department of Labor (DOL) has recently updated and revised the regulations issued under the Fair Labor Standards Act (FLSA). These regulations govern whether employees are classified as exempt or nonexempt from the FLSA's overtime provisions. The changes implemented by this final rule (the Final Rule) will go into effect on January 1, 2020, and according to the DOL will "allow 1.3 million workers to become newly entitled to overtime by updating the earnings thresholds necessary to exempt executive, administrative or professional employees from the FLSA's minimum wage and overtime pay requirements." While in many states these changes may significantly affect how employers classify employees as exempt or non-exempt, in other jurisdictions these changes will have little effect given the higher thresholds for exempt employee status used in those states or jurisdictions.
Increased Minimum Exempt Salary for Executive, Administrative, and Professional Exemptions
The DOL increased the minimum salary required for employees to qualify for the executive, administrative, and professional "white collar" exemptions under the FLSA. The minimum exempt salary has been increased from $23,660 per year ($455 a week) to $35,568 per year ($684 per week). The new minimum salary is substantially less than the $47,476 per year minimum salary proposed by President Obama's administration in its adopted overtime exemption rules. Those rules were blocked by a federal court injunction, and have now been withdrawn by the DOL's new Final Rule.1 Regardless, unless employers in affected jurisdictions increase minimum salaries to the new level, an employee may not be classified as exempt under the FLSA.
Nondiscretionary Commissions and Bonuses Count Towards Salary Basis
Employers may count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the minimum salary level requirement, but only if these amounts are paid at least annually. Employers should review commission plans to confirm that commissions are paid on an annual or more frequent basis.
Increased Minimum Exempt Salary for Highly Compensated Employees
The Final Rule also increases the minimum salary for employees to qualify for the highly compensated employee exemption from $100,000 to $107,432 per year (without regard to the payment of nondiscretionary bonuses and incentive payments).
Practical Effect for Employers
As a result of these changes, without pay adjustments, employees previously classified as exempt from the FLSA's overtime provisions but earning less than $684 per week will become nonexempt and eligible for overtime pay. Employers can choose to either increase the salaries for these employees or move the employees to nonexempt status. If employers select the latter option, they are required to track employee's working time and, under the FLSA, to pay employees at a premium rate for hours worked in excess of 40 hours in a work week.
Importantly, the Final Rule addresses only the federal standards applicable to the classification of exempt and non-exempt employees. Some states have enacted higher salary thresholds for employee exempt status, including New York (where salaries can vary depending on geographic location and employer size) and California (currently $49,920 for employers with 26 or more employees but increasing in 2020). Other states such as Washington are considering adopting higher salary thresholds. Generally, employers must follow the federal, state, or local legal requirements providing employees the greatest degree of protection. For that reason, for example, California employers will need to comply with California law as to their California employees, but as to their employees working in states governed by the FLSA standards, a lower salary standard may be applicable to an exempt employee classification decision.
Nonetheless, regardless of whether the DOL's new Final Rule require an employer to modify its FLSA exempt classifications for particular employees, employers should promptly (and certainly by year's end) review their current exemption classifications across the board to ensure compliance with all applicable state and federal regulations. WSGR can assist with overtime exemption audits to ensure the accuracy of employee classifications. These confidential audits can help clients avoid or minimize liability exposure and possibly be used affirmatively in litigation as a defense to additional penalties.
Wilson Sonsini Goodrich & Rosati closely follows developments in wage laws, including those pertaining to the DOL's new rules, as well as legislative changes happening at the state and local level. Attorneys in the firm's employment and trade secret litigation practices are available to discuss or review classifications, policies, and related practices for compliance with applicable law. For more information, please contact Rico Rosales, Marina Tsatalis, Jason Storck, Rebecca Stuart, or another member of the firm's employment or trade secret litigation practices.
