Except or Non-Exempt?  That is the question (which should not be answered by eenie-meenie-miney-mo)!  The U.S. Department of Labor (“DOL”) issued its Final Rule today (September 24, 2019) regarding the overtime exceptions under the so-called “white collar” exemptions.  As you may recall, the DOL previously issued a final rule in May 2016, but that rule was declared invalid, and the appeal held in abeyance pending this new Final Rule.  Accordingly, today the DOL has rescinded the 2016 final rule, which you can read more about here.

What’s New?  Effective January 1, 2020:

  • SALARY THRESHOLD. The salary threshold will be increased from $455 to $685 per week ($35,568 annualized).  The salary threshold for highly compensated employees (“HCE”) is raised from $100k to $107,432 per year.
  • MINIMUM GUARANTEE. A minimum guarantee plus extras is acceptable, so long as the employee also is guaranteed $684/wk.
    • For example, an inside salesperson makes a guarantee of $684/wk plus 1% commissions
    • An employee may be paid $684/wk plus additional compensation based on hours worked beyond a normal workweek, based on any basis (flat sum, bonus, straight-time hourly, time and one-half or any other basis) and may include paid time off.
  • NON-DISCRETIONARY BONUSES INCLUDED UP TO $3,556.80. Employers may now use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary level (i.e. no greater than $3,556.80), so long as it is paid at least annually.
    • If the employee does not earn enough bonus and incentive payments, however, to retain the salary threshold, an employer must make a “catch-up” payment within one pay period of the 52-week period (up to 10%) in order to retain the exemption.
    • In this case, the catch-up payment does not count toward compensation for the year it was paid, but the prior years’ salary amount (that it is applied to).
    • The 52-week period may be any consistent period (i.e. a calendar year, fiscal year, anniversary of date of hire).
    • If an employee does not work a full 52-week period due to being a new hire, or terminated, the employee may qualify if the employee receives a pro rata portion of the $3,556.80, based on the number of weeks employed.
  • COMPUTING EARNINGS ON HOURLY, DAILY, SHIFT BASIS. Earnings may be computed on an hourly, daily, or shift basis if the employee is guaranteed $684/wk and a, “reasonable relationship exists between the guaranteed amount and the amount actually earned.”  This test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.  There are other nuances to this method, so be sure to understand the rule fully before using this method.
  • COMPUTING EARNINGS ON A FEE BASIS. Earnings may be computed on a fee basis, if the fee payment is at a rate that would amount to at least $684/wk (i.e. being paid $350 to create a widget that took 20 hours to complete as 40 hours of that work would amount to $700/wk).

Additionally, the DOL noted its intention to update the salary levels and HCE levels more regularly in the future (via notice and comment rulemaking).  There is no automatic threshold increase at this time.  Also note, the DOL did not change or alter the duties test at all.

What Should Employers Do?

  • CONDUCT AN INTERNAL AUDIT. Now is the time for an end-of-year internal wage and hour audit – start now so that any changes can be made prior to January 1, 2020 (give yourself at least 4-6 weeks for an audit to collect job descriptions,  analyze organizational charts, talk to supervisors about actual duties, update job descriptions, etc.).  The issuance of the final rule is the perfect time to review each exempt employee’s job duties and pay, and verify (or correct) whether the employee is properly classified before January 1, 2020.
    • Keep in mind that any communications that you have internally and all internal wage and hour audit work done without counsel to assist, is not privileged, and thus, may be discoverable. Thus, if someone concludes or sends an email, or creates an analysis that concludes an employee should be non-exempt, and it is ultimately decided the person is going to remain exempt, and that employee, or another challenges that exemption in the future, all of those documents are potentially discoverable by the then-plaintiff who will certainly point to those communications in support of a willful violation (which allows them to go back 3 years instead of 2 for backpay).
    • Remember that the salary threshold is just one component of determining whether an employee is exempt from overtime, so when auditing, you must address all three components. An employee must also meet: (1) the duties test (the duties must primarily involve executive, administrative, or professional duties as defined by the regulations); (2) the salary basis test (paid a fixed salary regardless of variations in quality or quantity of work – including hours worked); and (3) the salary level test (paid at least $685/wk).
  • CONDUCT PERFORMANCE REVIEWS OR MERIT INCREASES TO BE EFFECTIVE JANUARY 1, 2020. To the extent possible, conduct performance reviews at the end of the year so that any necessary changes (whether an employee is moved to hourly or given enough of an increase to remain exempt) can be made by January 1.
  • UPDATE YOUR EMPLOYEE HANDBOOK.  The beginning of the year is also the perfect time to roll out a new or revised employee handbook.  Review your handbook to determine whether any definitions of “salaried” or “exempt” are consistent with the new rule.  Review your overtime policies and be sure you are compliant with other 2019 changes, and any vacation/sick/PTO is compliant with any applicable sick and safe leave laws or ordinances.

Finally, this does not change Minnesota’s FLSA and any other state laws, which may be more restrictive (for example, Minnesota does not recognize the computer employee exemption).  Recall that the higher standard (whichever is more employee favorable) applies.