[USA] Department of labor publishes Final Rule to overtime law

At the end of September, the Department of Labor published its Final Rule in connection with the so-called ‘white-collar’ overtime exemptions, The National Law Review reports on the Final Rule and summarises what you need to know.

The Final Rule goes into effect on January 1, 2020, raising the salary threshold for ‘white-collar’ overtime exemptions from $455 per week to $684 per week (the equivalent of $35,568 for a full-year employee). Employers can also use non-discretionary bonuses and incentive payments, including commissions, to fulfill up to 10 per cent of the new salary threshold if they are paid at least annually. Additionally, the rule increases the total compensation requirement for “highly compensated employees” from its current $100,000 per year threshold to $107,432 per year.

An earlier attempt was made by the Obama administration to increase the salary threshold for the white-collar exemptions to roughly $47,500. That 2016 rule was ultimately blocked in the days before its effective date by a Texas federal judge but many employers had reportedly implemented changes or made preparations for the proposed rule. Employers should use the publication of the Final Rule as a chance to review their current pay and employee classification practices again, regardless.

Primarily, employers should remember that meeting the salary threshold is just one requirement for classifying workers as exempt and understand that it is not enough to just pay an employee above the salary threshold to keep from paying overtime to that employee. To be properly exempt, employees also have to meet the “duties” tests for one of the recognised exemptions.

Each of the “white collar” (executive, administrative, and professional) exemptions has a different “duties” test, all of which are outlined in the DOL’s recently revised fact sheet: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (link via original reporting)

The new rule has made no changes to these duties tests but employers should use the forthcoming change as a chance to carefully review the current duties of their employees to Make sure those who have been classified as exempt satisfy the requirements of the tests. Any changes - even to the classification of workers unaffected by the salary threshold change - can be rolled out alongside the new rule implementation.

Secondly, employers must decide how to classify employees who are exempt now but who earn less than the new threshold. Among options for addressing the threshold are the following:

  • For employees earning close to the new threshold, you may decide to increase the salary to keep the employee’s status as “exempt”
  • For other employees, you may choose to disallow or significantly limit overtime. Newly non-exempt employees must keep a record of all of their work time, including unpaid breaks - a practice they may not be used to. You must explain expectations about the tracking of work time and working overtime to these employees in writing
  • For employees significantly beneath the threshold who do not consistently work overtime, paying occasional overtime might be the better economic approach
  • You may decide to reduce your hourly basic rate so that adding overtime does not alter weekly compensation. Employers should be conscious that this approach could affect morale or prompt resignations

Though there is still the possibility of legal challenges to the rule, employers would be well advised to review their policies in line with the above advice to prepare for the January 1 implementation date.