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DOL issues new overtime exemption threshold
Rule increases white collar annual salary exemption threshold to $35,568, up from $23,660.
About 1.3 million more American workers will be eligible for overtime pay under the Fair Labor Standards Act next year, thanks to the U.S. Department of Labor updating its exemption salary threshold for the first time in 15 years.
On Sept. 24, the DOL announced its rule updating the minimum salary level required to exempt executive, administrative or professional employees from overtime.
Effective Jan. 1, the threshold for exemption of eligible employees from overtime pay for hours worked past 40 per week is $35,568, up from the $23,660 in effect since 2004.
In terms of weekly pay rates, the threshold change is from $455 to $684 per week.
Employers with salaried workers whose pay falls below the threshold will have two options: raise the affected employees’ salaries above the threshold or convert them to hourly workers and pay them overtime for hours worked past 40 per week.
The new rule comes after the DOL under President Barack Obama’s administration in 2016 sought and failed to raise the overtime exemption threshold to $47,476 per year — a move which would have made 4.2 million more U.S. workers eligible for overtime pay, according to Mark Smith, a human resources and employment law attorney at Rhoades McKee.
“That increase was met with strong opposition from the business community and a number of states before a federal district judge in Texas ruled that the DOL had exceeded its rule-making authority by increasing the base salary so drastically and by mandating that the base salary level be increased every three years,” Smith wrote in a legal alert for clients at rhoadesmckee.com.
In an interview with the Business Journal, Smith said a court would only intervene against the new rule if an employer or employee group sued in hopes of setting a different threshold.
“I think it’s way less likely that an employer group is going to challenge it this time around,” he said, calling it a “less drastic” threshold that is meant to be “a way to weed out people that just plainly shouldn’t be on salary.”
By the same token, he said any employee group looking to sue for a higher threshold would have to first get this rule stricken, which would revert the base salary exemption to the 2004 threshold of $23,660, with no guarantee of getting a new threshold implemented that is as high or higher than $35,568.
Patrick Pizzella, acting U.S. secretary of labor, said this was a major accomplishment for his department.
“This rule brings a common-sense approach that offers consistency and certainty for employers, as well as clarity and prosperity for American workers,” he said.
Cheryl Stanton, Wage and Hour Division administrator for the DOL, said the rule is “a thoughtful product informed by public comment, listening sessions and longstanding calculations.”
“The Wage and Hour Division now turns to help employers comply and ensure that workers will be receiving their overtime pay,” she said.
The DOL issued a fact sheet, available at bit.ly/DOLdutiestest, that is designed to help employers pinpoint if their employees are categorized as administrative, professional or executive via a series of duties tests.
For example, the exemption for “professional employees,” which is perhaps the least obvious definition of the three, would apply to those who meet the following tests:
The employee must be compensated on a salary or fee basis below the threshold.
The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment.
The advanced knowledge must be in a field of science or learning.
The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction — which Smith said could include degree programs and/or certifications.
“The duties test has some subjectivity to it,” Smith said.
“People ought to have legal counsel walk them through that issue, and one reason to do it is that under the Fair Labor Standards Act, there’s a category of offenses known as willful violations, which allows someone up to three years after the fact to challenge how their employer classified them rather than the normal two-year look-back period.”
Employers that seek legal counsel on their employees’ status, he said, could not be defined as in “willful” violation even if they are audited by the DOL and found in violation of the FLSA overtime rule within the three-year period.
If employees can show a willful violation occurred, they would be eligible for “liquidated damages equal to double the amount of what they should have been paid in overtime, plus attorney’s fees,” Smith said.
He added calculating that amount would be tricky but not impossible — the DOL would start with the presumption that the employee is telling the truth about how many hours they work and then would look for evidence, whether it’s computer logins, emails, document time stamps, etc.
The other provisions of the new overtime rule are as follows:
Raising the total annual salary level for “highly compensated employees” — or those who perform mostly office or nonmanual work and who meet some, but not all, of the requirements to be classified as executive, administrative or professional employees — from the currently enforced level of $100,000 to $107,432 per year, so that these employees must be paid the new base salary, plus additional compensation to reach the new threshold.
Allowing employers to use nondiscretionary bonuses and incentive payments that are paid at least annually, including commissions, to satisfy up to 10% of the standard salary level in recognition of evolving pay practices.
Revising the special salary levels for workers in U.S. territories and in the motion picture industry.
More information about the final rule is available at bit.ly/DOLfinalrule.