DOL Updates Overtime Exemption Rules
Starting January 2020, the U.S. Department of Labor (the “DOL”) will begin enforcing updated regulations to the Fair Labor Standards Act (“FLSA”). Under the FLSA, an employee is entitled to overtime when he or she works more than 40 hours per week. The new regulations change the exemptions to the overtime requirements for executive, administrative, or professional employees (the “EAP exemptions”).
Three tests determine whether an employer is exempt from paying overtime to an employee: the Duties, Salary Basis, and Salary Level Tests. First, the employee’s job duties must primarily involve executive, administrative, or professional duties. This is the Duties Test. An executive employee is one who holds a managerial role with the authority to hire and fire. An administrative employee is one works in an office and exercises discretion and independent judgment with respect to matters of significance. Finally, a professional employee is one whose job requires advanced knowledge obtained through specialized instruction. The second test, the Salary Basis Test, requires the employee to be paid on a predetermined and fixed salary that cannot be reduced because of variations in quality or quantity of work. Under the third test, the Salary Level Test, the employee’s salary must meet the amount specified in the regulation.
Updated Standard Salary Level
The most dramatic change to the regulations concerns minimum salary requirements under the Salary Level Test. Previously, employees earning less than $455 per week ($23,660 per year) were eligible for overtime pay. Under the new rules, employees will be eligible for overtime if their salary does not exceed $684 per week ($35,568 per year). The Salary Level Test threshold is still based on an employee’s weekly earnings. If an employee earns more than $684 per week and meets the Duties Test, then the regulations exempt that employee from the overtime requirement. This exemption does not apply to “blue collar” employees, i.e., someone who “perform[s] work involving repetitive operations with their hands, physical skill and energy.” The DOL expects that approximately 1.3 million American workers will now be eligible for overtime pay as a result of this change.
Treatment of Nondiscretionary Bonuses and Incentive Payments
In 2016, the DOL first allowed employers to count ten percent of “nondiscretionary bonuses and incentive payments” toward an employee’s salary level. Such payments must be predetermined by the employer, e.g., bonuses for achieving set goals or commissions based on a fixed formula. Nondiscretionary bonuses and incentive payments do not include employer benefit contributions, or the value of board, lodging, and other facilities.
The updated rules decrease the frequency with which employers must pay nondiscretionary bonuses and incentive payments. The 2016 rule required employers to pay such bonuses at least quarterly. Now employers may make such payments on an annual basis.
The rules also permit employers to make a “catch-up” payment. If an employee did not earn enough in nondiscretionary bonuses or incentive payments to pass the salary level test in a given year, the employer may make a “catch-up” payment in the next pay period to maintain the employee’s exempt status. This payment is capped at ten percent of the total salary level for the preceding 52-week period. Any such payment will count only toward the prior year’s salary level and not toward the salary level in the year in which it is paid.
Special Base Rate for the Motion Picture Producing Industry
Employees in the motion picture producing industry do not need to be paid a predetermined and fixed salary if they are paid a specified base rate. This exception dates back to 1953 to address the “peculiar employment conditions existing in the industry.” The new rule increases the industry’s base rate from $695 per week to $1,043 per week. Film industry employees qualify for the EAP exemption if they are compensated at the base rate and meet the duties test. If an employee does not work a full workweek, an employer may prorate the weekly base rate based on the number of days worked.
Highly Compensated Employees
Another important change under the new rules surrounds the definition and compensation of highly compensated employees. First, the employee must earn at least $107,432, an increase from the $100,000 salary required under the previous rules. The DOL balances this higher Salary Level Test with a more lenient Duties Test. The employee’s duties must primarily include performing non-manual work. This is a more relaxed version of the standard Duties Test because of the assumption that an employee who earns a salary of at least $107,432 otherwise satisfies the Duties Test.
Special Salary Levels for Employees in U.S. Territories
While the new rules raise the standard salary level for the states, salary levels for all five of the United States’ permanently inhabited territories – Puerto Rico, the Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa – are fixed at their current levels.
Andrew R. Vazquez, J.D. and Ethan Vernon J.D., MTX represent individuals, partnerships and closely-held businesses in tax controversy and tax litigation matters and handle complex estate planning for Asbury Law Firm in Decatur, GA.