Labor Department Finalizes Overtime Pay Exemptions

On Sept. 27, the U.S. Department of Labor published a final rule to update and revise regulations implementing overtime pay exemptions.

The headline news is the threshold for exempt treatment was increased from $23,660 per year to $35,568 per year (in contrast to the Obama administration’s $47,476 threshold which never went into effect), and DOL clarified for the first time the manner in which commissions and other discretionary pay can be included in that calculation.

The final rule rescinds the Obama administration’s overtime rule, which was finalized in May 2016 and subsequently put on hold by a federal district court, and updates federal overtime regulations. It goes into effect Jan. 1, 2020.

Under the Fair Labor Standards Act, the overtime rule (also known as the “white collar” exemption) requires employers to pay eligible employees one and a half times their regular hourly rate when they work overtime (more than 40 hours in a week). Some employees, however, are exempt from this general rule (i.e., overtime ineligible) and do not need to be paid extra for overtime hours worked.

For employees to be exempt from overtime requirements under the FLSA, they must (1) be paid a predetermined fixed salary that meets a minimum specified amount and (2) be “primarily” involved in “executive,” “administrative,” or “professional” duties as defined under the regulations.

Crucial details of the final rule include:

• An increase in the salary threshold that triggers the overtime exemption from the current level of $455 per week (approximately $23,660 per year) to $684 per week ($35,568 per year)
• An increase in the highly compensated employee threshold to $107,432 from $100,000 (this threshold generally applies to a narrow category of highly paid executive assistants)
• Permission for nondiscretionary bonuses and incentive payments (including commissions) that are paid yearly or more frequently to count toward as much as 10% of an employee’s salary for purposes of determining whether the exemption salary threshold has been satisfied
• A DOL commitment to “regularly” updating the salary levels through formal notice-and-comment rulemaking.

The final rule does not alter the “duties test,” which was part of the preexisting overtime rule and helps employers determine if their employees are performing tasks that would exempt them (or not) from the overtime payment requirements. Essentially, an employee’s primary duties (which DOL has indicated must constitute at least 50% of the employee’s working time) must relate to the management or general business operations of the employer or the employer’s customers, and those duties must involve the exercise of discretion and independent judgment to qualify for the exemption.

• Executive employees manage the enterprise or a department or subdivision of the enterprise. An exempt executive employee also must “customarily and regularly” direct the work of at least two employees and have the ability to hire or fire them, or that employee’s suggestions and/or recommendations vis-à-vis the hiring, firing or change in status of the other employees must be given particular weight.

• Administrative employees perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. An administrative employee’s primary duties also must involve the “exercise of discretion and independent judgment with respect to matters of significance.” Generally, work related to “management or general business operations” includes, but is not limited to, “work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement…and similar activities.”

• Professional employees must perform (1) work requiring advanced knowledge in a field of science or learning that is usually achieved by a “prolonged, course of specialized intellectual instruction” or (2) work requiring originality, invention, imagination, or talent in a recognized field of artistic or creative endeavor. Generally, professional employees perform work “requiring the consistent exercise of discretion and judgment, as distinguished from the performance of routine mental, manual, mechanical or physical work.”

Especially important for our industry, under the applicable rules, “professional employees” expressly includes:

• Outside sales employees who must primarily make sales or obtain orders or contracts for services (including insurance) for which a consideration will be paid by the client or customer. The employee also must customarily and regularly be engaged away from the employer’s place of business.

• Computer employees who must be “skilled in the computer field” and, in performing their duties, apply systems analysis techniques to determine hardware, software or system functional specifications or otherwise design, develop or modify computer systems and programs. An employee could also be exempt if his primary duty involves “planning, scheduling, and coordinating activities” necessary to develop systems to solve complex business problems for the employer.

Employees who meet the requirements set forth above and who also exceed the salary threshold (which now may include up to 10% of the employee’s commissions in the calculation) are excluded from the act’s minimum wage and overtime pay protections. Such employees are thus permitted to work any number of hours in the workweek beyond the traditional 40 hours and are not subject to the overtime pay requirements under the FLSA. It also is critical to note that, despite the standards set by the FLSA, the act does not preempt state standards that may be stricter than the federal standards.

The burden of establishing whether any FLSA exemption applies to a particular employee falls on the employer. Mere job titles and descriptions are not sufficient to determine exempt status, nor is paying an employee a fixed (non-hourly) salary adequate to establish that an employee is not eligible for overtime.

Your firm and your clients thus should consider reevaluating the classifications of your employees to ensure your records demonstrating compliance are in order. Attention to independent contractor status continues to be high, and it thus would be advisable to include that in any such review.