On September 27, 2019, the U.S. Department of Labor published its final rule raising the minimum required salary for exempt executive, administrative, and professional employees under the Fair Labor Standards Act (FLSA). The final rule, which does not make any changes to the duties tests for any of the FLSA exemptions, makes the following changes:

New Standard Salary Level

The current required salary level for exempt executive, administrative, and professional employees is $455 per week. The final rule increases that minimum salary to $684 per week (equivalent to $35,568 annually).

New Annual Compensation Level for Highly Compensated Employees

Under the current FLSA regulations, the “highly compensated employee” exemption applies to employees who: (a) are paid on a salary basis; (b) earn at least $100,000 in total annual compensation; and (c) customarily and regularly perform one or more of the exempt duties of an executive, administrative, or professional employee. The final rule increases the required compensation amount for highly compensated employees to $107,432 annually.

Nondiscretionary Bonuses, Incentives, and Commissions

Under the current FLSA regulations, the standard salary amount may only be satisfied by payment of a predetermined minimum guaranteed salary. The final rule revises the regulations to permit employers to count nondiscretionary bonuses, incentive payments, and commissions toward no more than 10% of the new required salary level, as long as these amounts are paid out annually or more frequently subject to a single “catch-up” payment within one pay period of the close of the year.

Timing and Effect

The final rule is set to take effect on January 1, 2020. The final rule also formally rescinds the previous final rule issued by the Department of Labor in 2016 that would have set an even higher salary threshold for exempt executive, administrative, and professional employees (a federal judge in the Eastern District of Texas enjoined the enforcement of those regulations before they could go into effect).

Compliance Steps for Employers

Employers should review their current employee salaries and FLSA classifications and identify any executive, administrative, or professional employees who earn less than $35,568 annually and are currently classified as exempt. Employers have two main options for these employees.

First, employers may retain the FLSA exemption by raising employee pay to the new required salary level ($35,568 annually). In doing so, it is a good time for employers to review whether the particular employee still meets the applicable duties test for the FLSA exemption as well as any substantive state law requirements that may apply.

Second, employers may reclassify employees as non-exempt and begin paying overtime. For many affected employees, this will entail new time-reporting obligations and greater oversight of their work schedules. In reclassifying an employee from salaried exempt to non-exempt, an employer may reduce the employee’s regular wages either in the form of a lower salary (plus overtime) or a new hourly rate (plus overtime) such that going forward the employee’s regular wages and new overtime pay are largely the same as the employee’s prior base salary.

Our Employment and Human resources professionals are available to assist and advise clients in addressing their FLSA compliance issues. To learn more about the issues raised by this client bulletin, please contact Mark Papadopoulos at mpapadopoulos@potomaclaw.com.

Note: This bulletin is for general use and should not be construed to provide legal advice as to particular factual situations.

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