DOL Issues Final Rule Regarding Changes to Salary Threshold for Exempt White-Collar Employees

On September 24, 2019, the U.S. Department of Labor (DOL) unveiled its long-awaited final rule changing the minimum salary employees must be paid in order to be deemed an exempt “white-collar” employee under the Fair Labor Standards Act (FLSA).  The final rule takes effect on January 1, 2020, and raises the current minimum salary level for exempt employees from $455 per week, or $23,660 annually, to $684 per week, or $35,568 annually. 

Under current DOL regulations, white-collar employees – executives, administrative employees and professionals – are exempt from the FLSA rules and need not be paid overtime for workweeks in which they work more than 40 hours if they satisfy three conditions: (1) they perform what the DOL has defined as “exempt” duties; (2) they are paid on a salary basis; and (3) they receive a guaranteed salary of at least $455 per week. The final rule only changes the minimum salary requirement.  Key features of the final rule are:

• Raises the salary threshold necessary for a white-collar employee to qualify as exempt to $684 per week or $35,568 annually.
• Does not change the duties tests which must be met for a white-collar employee to qualify as exempt.
• Does not change the “salary basis” test that requires, with limited exceptions, that an employee be paid a predetermined amount of compensation each pay period on a weekly, or less frequent, basis, for any week in which the employee performs any work, regardless of the number of days or hours worked.
• Provides that up to 10 percent (i.e., $3,556) of the annual minimum standard salary level may come from non-discretionary bonuses and incentive payments (including commissions) that are paid on an annual or more frequent basis to satisfy the standard salary level. Further. if after the 52-week period, the employer has not met its financial obligation, the employer can make a final “catch-up” payment within one pay period after the end of the 52-week period to bring an employee’s compensation up to the required level.
• Raises the salary threshold necessary to qualify for the highly compensated employee exemption from $100,000 to $107,432 annually. This exemption applies to employees who do not meet the full duties tests for any of the white-collar exemptions, but whose primary duty includes performing office or non-manual work, and who customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.  To qualify as a highly compensated employee, an employee must receive a weekly salary of at least $684 per week, in addition to other compensation such as bonuses and incentive payments (including commissions).
• Sets forth no automatic updates to the salary thresholds. The final rule provides that the thresholds will be updated more regularly (but not on any set fixed interval) in the future after notice and an opportunity to comment on any proposed changes before they are implemented. 

Employers have the balance of 2019 to review their workforce to determine what changes, if any, may be necessary in preparation for the January 1, 2020 effective date. Possible considerations include (1) raising the salary of employees who meet the duties test to at least $35,568 annually to retain their exempt status; (2) raising the salary of employees who meet the duties test to at least 90% of $35,568 ($32,012 ($616 weekly)) and paying at least $3,556  in non-discretionary bonuses and incentive payments (including commissions) so that employees receive at least $35,568 in a 52-week period; (3) converting employees to non-exempt status and paying the overtime premium of one-and-one-half times the employees’ regular pay rates for all overtime hours worked; or (4) converting employees to non-exempt status and eliminating or reducing the amount of overtime hours worked by such employees.

Given the likely increase in scrutiny of employer pay practices once the new rule goes into effect, now would also be a good time for employers to conduct an internal audit of its exempt positions, or at least those positions where exempt status is not black and white.  In determining whether an employee meets the required duties test, a logical first step is to review the employee’s job description.  However, while the employee’s job description is important, it is not controlling, nor is an employee’s job title.  In this regard, the employee’s actual duties will determine if the duties test is met.  An “inflated” job description will not sway a DOL investigator.  On the other hand, a job description that understates an employee’s duties could be a tough hurdle for an employer to overcome in convincing an investigator of an employee’s exempt status.  To avoid both of these scenarios, it is important to ensure that the job description captures the important aspects of an employee’s job and that it mirrors the factors contained in the applicable duties test.  If an employee’s job description does not capture the essence of the employee’s job, it should be revised.  If, on the other hand, an employee’s job duties do not meet the applicable duties tests, then the employee will either need to be reclassified to non-exempt status, or their duties will need to be enhanced.

Such a review is important as an employee who is misclassified, may either file a lawsuit against his/her employer, or file a claim with the DOL, within two years of an alleged violation of the FLSA, or three years where the violation by the employer was willful.  A willful FLSA violation occurs when “the employer either knew or showed reckless disregard for the matter of whether its conduct was prohibited by the statute.”  Violations of the FLSA can lead to substantial liability for an employer.  An employee who successfully challenges his/her exempt status can recover back pay (two years, or three if can show a willful violation), liquidated damages in an amount equal to the back pay, prejudgment interest, and reasonable attorney’s fees and costs.    Also, because many exempt employees are not required to account for the hours they work, an employer may not have documentation to refute a misclassified employee’s claims as to the number of hours in excess of 40 a week they worked, which claims may be inflated.  Finally, an employer’s exposure is compounded when it has multiple employees in the affected classification.

Melvin Muskovitz, a member of the Dykema Gossett PLLC Labor and Employment Law Group,  represents employers with respect to employment and labor matters.  Mr. Muskovitz can be reached at mmsukovitz@dykema.com and (734) 214-7633.    

The Orsus Group blog is provided for informational purposes only. It is not intended to be comprehensive, and is not a substitute for and should not be construed as legal advice. The Orsus Group does not warrant any statements in this blog. Any statutes or laws cited herein should be read in their entirety. You should direct to your own experienced legal counsel questions involving your organization’s compliance with or interpretation or application of laws or regulations and any additional legal requirements that may apply.