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On Sept. 24, 2019, the U.S. Department of Labor announced a final rule that, among other things, raised the salary thresholds for the “white collar” overtime exemptions to the Fair Labor Standards Act. According to the DOL, these changes will affect approximately 1.3 million American workers, many of which serve roles in the construction industry. The Final Rule will:

  1. raise the “standard salary level” from its current $23,660 per year ($455 per week) to $35,568 per year ($684 per week);
  2. raise the total annual compensation level for the “highly compensated” exemption from the currently-enforced level of $100,000 to $107,432 per year;
  3. allow employers to count non-discretionary bonuses, incentives and commissions toward up to 10% of the standard salary level required so long as the employer pays those amounts at least annually; and
  4. revise the special salary levels for workers in U.S. territories and in the motion picture industry.

The Final Rule, which represents the first change to the regulations since 2004, is set to take effect on January 1, 2020. Under this Rule, construction companies could be required to pay overtime to more employees whose salaries are less than the now increased salary level depending on their job duties.

These changes are significantly more modest than the changes that were proposed by the DOL under President Barack Obama and subsequently invalidated by a federal court. The changes proposed by the Obama DOL would have increased the “standard salary level” to $913 per week. Further, the Obama DOL changes would have created an automatic process for raising the salary minimums every three years without any need for formal notice-and-comment rulemaking. The current Final Rule will not have automatic increases.

Steps to Comply With the 'White Collar Exemptions' and the 'Highly Compensated Exemption'

Employees may be exempt from the FLSA’s overtime requirements under the “white collar” exemptions—generally speaking the administrative, executive and professional exemptions—if they meet all three of the following requirements: 

  1. they are paid on a salaried basis (not hourly); 
  2. they earn the “standard salary level” or more; and 
  3. they perform certain specified job duties depending on the exemption sought. 

The Final Rule does not alter the current “duties” requirements of the specific exemptions. Nonetheless, it is a good idea for employers to make sure that their exempt employees actually do meet the “duties” test for their specific exemption, which are outlined for different categories of positions on the DOL website. It is not unheard of for employers to misclassify employees as “exempt” when they really should be non-exempt based on their job responsibilities. 

As a best practice, employers should review the job duties of their exempt employees on a yearly or bi-annual basis. In making this evaluation, it is important that employers do not rely solely on job descriptions. Instead, employers should speak with persons who have first-hand knowledge of the job duties the exempt employee actually performs. These actual duties will carry the day over duties listed in a job description. 

If the employees in question meet the “job duties” test, employers next must make sure that they are paid on a salaried—not hourly—basis. The new rule does alter this requirement slightly. Employers may now satisfy up to 10% of the $684 weekly minimum salary by relying on non-discretionary bonuses and incentive compensation, so long as the employer pays those amounts at least annually. This means employers can pay a weekly minimum salary of $615.60 (not $684) to certain employees while maintaining those employees’ exempt status, so long as the employees receive a minimum of $3,556.80 per year in non-discretionary bonuses and incentive compensation. These payments can take many forms. A construction sales representative might receive a non-discretionary bonus for exceeding sales goals. An office administrator may receive a weekly attendance bonus. 

Finally, employers must ensure that the exempt employee’s salary meets the new “standard salary level” of $35,568 per year ($684 per week). This is likely to require employers in many industries, including construction, to raise the salary of certain positions in particular regions, namely salaried administrative staff. For employees whose salaries do not meet the new “standard salary level,” employers must decide whether to increase their salaries to satisfy the new level or to reclassify the employees as non-exempt. Employers who choose the latter may want to consider limiting the employee’s hours of work to reduce or eliminate the need to pay overtime. 

Employers will also need to evaluate the exempt status of their “highly compensated” exempt employees. The “highly compensated” exemption uses an abbreviated and easier-to-satisfy job duties test, but applies only to employees earning more than $100,000 per year in total compensation. Under the Final Rule, the $100,000 threshold will increase to $107,432 per year, and the annual compensation must include at least a guaranteed weekly salary of $684.

Although many exempt employees earning $100,000 fall under the “white collar” exemptions as well as the “highly compensated” exemption, if an employer has exempt employees who make between $100,000 and $107,432 per year, this is a good time to evaluate whether the employee satisfy the duties requirements of a “white collar” exemption, and if not, whether the employee satisfy the duties requirements of the “highly compensated” exemption (available from the DOL). If the employer has to rely on the “highly compensated” exemption alone, the exempt employee’s total compensation must be raised to at least $107,432 per year to maintain the exempt status. 

Final Thoughts

Although employers may focus on the Final Rule, it is important to note that the FLSA does not preempt state law. Several states, such as California and New York, already have stricter exemption requirements than does the FLSA. Several other states, such as Pennsylvania, Colorado and Michigan, are in the process of creating stricter requirements. These stricter requirements can include higher minimum salaries, stricter job duties requirements, or both. It is important for employers to evaluate the laws in all of the states where their exempt employees are performing work.

Finally, the Obama overtime requirements were not struck down until approximately two weeks before they were to take effect. Thus, by the time the Obama requirements were enjoined, many employers had already taken the measures necessary to come into compliance and many simply left those measures in place. For those employers, all that should be required now is a final review of existing job classifications and pay.

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