Department of Labor Rolls Out Long Anticipated Update to Overtime Regulations

In Employment Law by Coolidge Wall

On September 24, 2019, the Department of Labor issued a long anticipated final rule that will update the overtime regulations that have been in place since 2004. The Department of Labor’s mandates are scheduled to go into effect on January 1, 2020.

We now have the long-awaited answer to the question posed in a Coolidge Wall blog published May 1, 2017, titled “What Will Happen To The Salary-Exempt Regulations Under the New Administration?” After a proposed 2016 final rule issued by the Department of Labor updating the 2004 salary threshold requirements for overtime was invalidated by the U.S. District Court for the Eastern District of Texas, the Department of Labor continued to enforce the 2004 overtime regulations. Now, beginning January 1, 2020, the current salary thresholds will increase for the first time in over 15 years. According to the Department of Labor, the new overtime regulations will result in 1.3 million workers becoming newly entitled to overtime pay requirements.

What exactly will be changing under the new Department of Labor regulations issued under the Fair Labor Standards Act (FLSA)? The Department is updating both the minimum weekly standard salary level and the total annual compensation requirement for “highly compensated employees.” According to the Department, the changes are being made to account for growth in employee earnings since the currently enforced thresholds were set in 2004. In a statement issued by the Department’s Wage and Hour Division Administrator, Cheryl Stanton, “Today’s rule is the thoughtful product informed by public comment, listening sessions, and long-standing calculations.”

Here are the Department’s final rule changes by the numbers:

  • $684 per week is the new weekly “standard salary level.” This is an increase from the currently enforced level of $455 per week. This increased weekly standard salary level is the equivalent of $35,568 per year for a full-year worker;
  • $107,432 per year is the new total annual compensation level for “highly compensated employees (HCE).” This increase raises the threshold from the currently-enforced level of $100,000.
  • 10% is the amount of the standard salary level the final rule allows employers to cover with nondiscretionary bonuses and incentive payments that are paid annually or more frequently. The Department has indicated commissions are included as incentive payments. According to the Department, this change is in recognition of evolving pay practices. The Department has acknowledged that some businesses pay significantly larger bonuses, including bonuses tied to productivity or profitability (e.g., a bonus based on the specific percentage of the profits generated by a business in the prior year). It is important to note that the amount attributable toward the standard salary level is capped at 10% of the required salary amount regardless of the total bonus or incentive pay amount.
  • U.S. Territories have also had their special salary levels revised. This change impacts businesses and employees in Puerto Rico, U.S. Virgin Islands, Guam, American Samoa and the Commonwealth of the Northern Mariana Islands.
  • $1,043 per week is the new “base rate” threshold for employees in the motion picture industry.
  • $298.8 million transferred from employers to employees. The final rule will transfer income from employers to employees in the form of wages. The Department estimates annualized transfers will be $298.8 million. The majority of these transfers will be attributable to the FLSA’s overtime provision. A smaller share will be attributable to the FLSA’s minimum wage requirement.
  • $173.3 million is the direct cost to employers for coming into compliance with the new overtime regulations over the first 10 years. The Department’s analysis quantifies three direct costs to employers: (1) regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. These costs are the combined costs for both the change in the standard salary level test and the highly compensated employee (HCE) total annual compensation level. The Department indicates these costs assume a 7 percent discount rate.

Employers need to begin taking action immediately. Recommended actions include the following:

  • Employers should start by identifying which of their exempt employees under the current regulations make less than the weekly “standard salary level” and “highly compensated employee” annual threshold that is set to go into effect January 1, 2020.
  • Employers must then weigh the benefits of increasing employee salaries above the new thresholds against the price of reclassifying some employees as nonexempt and potentially paying them premium for overtime.
  • Employers must determine when to implement any changes made to salary levels or position reclassification prior to the January 1, 2020 deadline.

The labor and employment attorneys at Coolidge Wall are available to assist you if you have any questions about the new regulations or you want guidance as to how the regulations can be properly implemented in your workforce.