U.S. Department of Labor Raises New Salary Levels for “White Collar” Overtime Exemptions

October 4, 2019
On September 24, 2019, the U.S. Department of Labor issued a final rule revising its overtime exemption regulations, which it estimates will result in 1.3 million workers becoming newly entitled to receive overtime pay.  The Department’s overtime exemption regulations have not been updated since 2004.  The Department previously attempted to revise its overtime regulations in 2016, but those regulations were enjoined by a federal court.  After the injunction, the Department proposed new regulations through notice-and-comment rulemaking.  The final rule is largely consistent with the Department’s March 7, 2019 Notice of Proposed Rulemaking (“NPRM”), with certain important differences discussed below.  The revised regulations will take effect on January 1, 2010, which gives employers about three months to comply.

The Fair Labor Standards Act (“FLSA”) requires employers to pay covered employees time and one-half their regular hourly wage rate for all hours worked in excess of 40 in any workweek.  The Act exempts from overtime requirements “any employee employed in a bona fide executive, administrative, or professional capacity,” 29 U.S.C. § 213(a)(1), commonly referred to as the “white collar” exemption.  The Department is charged with interpreting this exemption and, since the 1940s, has included a “salary-level” test in addition to a duties test, as part of its regulations prescribing which employees fall within the white-collar exemption.

In May 2016, the Department issued new regulations, which were scheduled to take effect on December 1, 2016, substantially raising the salary threshold from $455 per week ($23,660 per year) to $913 per week ($47,476 per year).  (See our May 31, 2016 memorandum for more discussion of the 2016 rule.)  Various states and business groups sued to block the Department’s overtime regulations and, on November 22, 2016, Judge Amos Mazzant of the Eastern District of Texas temporarily enjoined the regulations on a nationwide basis.  Nevada v. U.S. Dep’t of Labor, 218 F. Supp. 3d 520 (E.D. Tex. 2016).  Judge Mazzant held that “the Department exceed[ed] its delegated authority and ignore[d] Congress’s intent by raising the minimum salary level such that it supplants the duties test.”  Id. at 530.  (See our November 29, 2016 memorandum for more discussion of Judge Mazzant’s decision.)  By order dated August 31, 2017, Judge Mazzant permanently enjoined the regulations.  Nevada v. U.S. Dep’t of Labor, 2017 WL 3837230 (E.D. Tex. Aug. 31, 2017).  (See our September 5, 2017 memorandum for more discussion of Judge Mazzant’s decision.)  The Department appealed the original temporary injunction ruling to the Fifth Circuit but, after the change in Presidential administrations, the Department informed the Fifth Circuit that it intended to implement new overtime regulations through notice-and-comment rulemaking.  (See our July 7, 2017 blog post for more discussion of the appeal.)  The Fifth Circuit is holding the appeal in abeyance pending the new rulemaking.

The rulemaking process began on July 26, 2017, when the Department issued a Request for Information (“RFI”) soliciting comments about the overtime rules and began holding “listening sessions” around the country in advance of proposing a new rule.  (See our July 27, 2017 blog post for more discussion of the RFI.)  On March 7, 2019, the Department issued the NPRM proposing to (1) rescind formally the 2016 rule; (2) institute a new rule that would increase the minimum salary threshold from $455 per week ($23,660 per year) to $679 per week ($35,308 per year) by applying the same methodology as the prior 2004 rulemaking did; (3) permit nondiscretionary bonuses and incentive payments to count towards up to 10% of the standard salary level; and (4) update the salary threshold for the Highly Compensated Employee (“HCE”) test, which applies a reduced duties requirement to determine exempt status, from $100,000 per year to $147,414 per year.  (See our March 11, 2019 blog post for more discussion of the proposed rule.) 

First, the final rule raises the minimum salary threshold for white-collar exemptions to $684 per week ($35,568 per year) instead of the $679 per week ($35,308 per year) proposed in the NPRM.  The thresholds are slightly different because the NPRM used projected salary data to January 2020 for the 20th percentile of full-time salaried workers in the lowest-wage region, currently the South, and in the retail industry nationally, while the final rule used the most recent data available (July 2016 to June 2019).  The Department estimates that the final rule will result in 1.2 million newly overtime-eligible employees. 

Second, the final rule permits employers to satisfy up to 10% of the salary threshold with “nondiscretionary bonuses and incentive payments (including commissions), provided that such payments are paid no less frequently than on an annual basis.”  The Department explained that this change—which it adopted from the NPRM “without modification”—“appropriately modernizes the regulations to accounts for . . . compensation practices in a growing number of workplaces.”

Third, “[t]he final rule permits employers to meet the salary level requirement by  making a “catch-up payment within one pay period of the end of the 52-week period,” which is capped at “up to ten percent of the required salary level.”  Thus, if, at the end of a 52-week pay period, the employee’s salary plus nondiscretionary bonuses and incentive payments fall below the salary threshold, the employer has “one pay period to make up for the shortfall.”  This proposal was also included in the NPRM.

Fourth, the final rule raised the salary threshold for the HCE test from $100,000 per year to $107,432 per year instead of the $147,414 per year proposed in the NPRM.  The threshold is different because the Department used salary data for the 80th percentile, instead of the 90th percentile, of full-time salaried workers nationally from 2018 to 2019.  The Department agreed with commenters that a dramatic increase (from $100,000 to $147,414 per year) would result in significant administrative burdens and compliance costs on employers while having a limited effect on exempt employees since the majority of exempt HCE employees would remain exempt under the standard test. 

Fifth, although several commenters proposed modifying the duties test, the Department declined to do so because both employees and employers have relied upon it for fifteen years.  The Department emphasized that it would be inappropriate to make such a significant change without first proposing it in the NPRM.

Finally, whereas the NPRM proposed updating salary levels every four years, the final rule states that the Department will review the salary threshold “regularly” and propose updates through notice-and-comment rulemaking to maintain “flexibility to update the earnings thresholds in a manner that is tailored to wages and economic conditions.”

The Department’s final rule is available on its website, and will be published in the Federal Register. 
 

DOL Wages and Overtime