Minimum Salary For Federal Overtime Exemption Is Increasing January 1, 2020
Topics: Wage & Hour Issues
Today, the United States Department of Labor issued its final rule increasing the minimum salary for a worker to be exempt from overtime compensation under the Fair Labor Standards Act (“FLSA”), effective January 1, 2020. This new standard sets the floor for all employees who are classified by their employers as exempt from overtime. However, some states, including California, have higher minimum salary thresholds than federal law, and employers are reminded that they must comply with whichever law is more favorable to the employee. The changes to the FLSA overtime exemptions, and the implications for California employers, are described more fully below.
Increase In Minimum Salary for Exempt Status
For exempt managerial, administrative, and professional employees, the minimum salary will now be $35,568 per year (compared to the current $23,660). Federal law also recognizes a separate highly compensated employee exemption, which involves a simpler test for determining whether an employee is exempt from overtime. Under the new rule, the minimum “total annual compensation” to qualify for this exemption is increasing to $107,432 (compared to the current $100,000), and at least $684 per week must be paid on a salary or fee basis. The new law also sets special salary levels for workers in U.S. territories and the motion picture industry. (If you have workers covered by these specialized rules, you’ll want to familiarize yourself with the unique requirements applicable to these workers). The new salary thresholds take effect January 1, 2020.
The increases to the salary level are much more modest than those that had been adopted by the Department of Labor under the Obama administration. Those earlier changes never took effect, but would have raised the minimum salary for exempt managerial, administrative, and professional employees to $47,476, and the minimum salary for highly compensated employees to $134,004.
Non-Discretionary Bonuses May Be Included
Under the new FLSA rule, employers will be able to count certain bonuses and incentive compensation toward meeting 10% of the minimum salary thresholds for exempt managerial, administrative, and professional employees. More specifically, employers may count non-discretionary bonuses, incentives, and commissions that are paid annually or more frequently. An employer may designate and utilize any 52-week period it chooses for this purpose (e.g. calendar year, fiscal year, anniversary year). If, by the last pay period of the 52-week period, the employee’s total compensation (salary plus non-discretionary bonuses, incentive compensation, and commissions) is less than $35,568, the employer may make one final payment to meet this threshold no later than the next pay period following the end of the year. Importantly, this payment may only be counted toward the prior year’s threshold and not also the current year’s threshold. If an employer fails to make this catch-up payment, the overtime exemption will be lost for that 52-week period.
For the highly compensated employee exemption, the rule is similar. These employees must be paid total annual compensation of at least $107,432, at least $35,568 of which must be paid on a salary basis (i.e. a predetermined, guaranteed amount each pay period that is not based on production). Employers may count commissions, non-discretionary bonuses, and other non-discretionary compensation toward meeting the $107,432 annual threshold. [Employers may not count board, lodging, or other facilities, and/or fringe benefits.] If, by the end of the 52-week period, the employee’s total annual compensation is not at least $107,432, the employer may make one final payment to the employee to meet this threshold within one month after the end of the 52-week period. If the employer fails to make such a payment, the highly compensated employee exemption will be lost.
No Changes to “Duties” Tests
As all employers should be aware, exempt status depends not only on compensation level, but also on an employee performing duties (e.g. professional, managerial, and/or administrative) that are associated with exempt status. The new overtime rule does not change the existing duties tests under the FLSA.
Impact on California Employers
The increases to the salary levels for exempt status under the FLSA do not directly impact California employees because California has its own laws requiring a higher minimum salary to qualify for exempt status. Employers with California employees have to comply with the higher California salary thresholds for their California employees. As a reminder, the current minimum annual salary for most exempt managerial, administrative, and professional employees in California is $49,920 ($45,760 for employers with 25 or fewer employees). There are also unique California requirements for certain computer professionals and doctors.
Importantly, unlike federal law, California does not recognize a “highly compensated employee” exemption. California also does not have any provision allowing bonuses, commissions, and incentives to be counted in reaching the minimum salary thresholds for exempt status. Furthermore, the duties test in California remains much more stringent than the duties test under federal law. In California, an employee must spend more than 50% of his or her time performing exempt duties each workweek in order to qualify as exempt from overtime.
Employers with employees in states other than California should review their compensation levels for their exempt employees and implement any changes necessary to comply with the changing federal requirements by January 1, 2020. These changes may include re-classifying exempt employees to non-exempt employees, and/or increasing salary levels as necessary to retain exempt status.