By Erica E. Flores
The U.S. Department of Labor announced on Tuesday that it has finalized proposed changes to the salary threshold for the overtime exemptions under the Fair Labor Standards Act. As we reported in a previous post last March, the agency initially proposed to increase the standard salary threshold by 50%, from $455/week ($23,660/year) to $679/week ($35,308/year), and the “highly-compensated employee” salary threshold from $100,000/year to $147,414/year. The final rule, however, will raise the basic salary threshold by an additional $5.00, to $684/week ($35,568/year), and will drop the proposed increase to the “highly-compensated employee” threshold by nearly $40,000, to just $107,432. The rule change also finalized the agency’s proposal to allow employers to use non-discretionary bonuses and incentive payments (including commissions) to account for up to 10% of the required salary, but abandoned the DOL’s proposed commitment to review the salary thresholds every four years. The changes will go into effect on January 1, 2020.
The final rule represents a significant departure from the changes that were adopted by the DOL under President Obama, which would have more than doubled the standard salary threshold—to $913/week ($47,476). As we reported back in August 2017, that rule change was halted by a federal court in Texas in November 2016 and was ultimately abandoned by the DOL. Instead, the DOL sought input from the public, including on whether the threshold should be adjusted on the basis of inflation and whether the regulations should contain multiple salary levels. In response, the DOL received more than 200,000 comments and held six public listening sessions across the country. The proposed rule published back in March was the result of that feedback.
During the ensuing 60-day comment period, the DOL received more than 116,000 additional comments. That additional feedback prompted the DOL to modify the method it used to determine the new salary thresholds. The March 2019 proposed rule set the basic salary threshold at the 20th percentile of full-time salaried workers in the lowest-wage Census Region (the South) and in the retail industry nationwide based on 2017 data, it set the “highly-compensated employee” threshold at the 90th percentile of all full-time salaried workers nationwide based on 2017 data, and it proposed to adjust both of those figures for inflation through January 2020.
In the final rule, however, the DOL opted to use pooled data for 2016 through 2019 to set the salary thresholds, it reduced the “highly-compensated employee” threshold to the 80th percentile of all full-time salaried workers nationwide (a drop of nearly $40,000), and it decided not to adjust either of the thresholds for inflation through January 2020.
The DOL also committed to update the salary thresholds and related regulations “more regularly” but decided against mandating that such a review be done every four years based on its belief that “prevailing economic conditions, rather than fixed timelines, should drive future updates.” Any future update would continue to be subject to the formal notice-and-comment rulemaking process.
Based on the final regulations, employers who employ exempt workers should review their compensation (including any non-discretionary bonuses and commissions) to ensure that they earn enough to qualify for exempt status as of January 1, 2020. If they do not, employers will have two choices—they can reclassify the employees as non-exempt and start paying them overtime or they can increase their compensation to meet or exceed the new salary thresholds in accordance with the final rule.