Exempt vs Non-exempt: FLSA Final Rule Announced

If you’re like many employers, you’ve been following the developments about the DOL’s long-anticipated final rule regarding overtime eligibility. The law is critical to correctly classifying exempt and non-exempt employees, and many employers have been left in a holding pattern since updates were first suggested in 2016.

Where We’ve Been

Changes proposed to the FLSA in 2016 included raising the salary threshold for employees exempt from overtime from $23,600.00 annually (or $455.00 per week) to $47,476.00 annually (or $913.00 per week). However, the final rule was blocked by an injunction from a Texas federal court.

The DOL appealed, a new president and a new Secretary of Labor both took office in 2017, then:

• In June the DOL dropped its appeal of the injunction.
• In July it published a Request for Information (RFI) for public input on the economic consequences and received more than 140,000 comments.
• In November, Sen. Sherrod Brown (D-OH) and Rep. Mark Takano (D-CA-41) introduced bills in the US House and Senate. Known as the Restoring Overtime Pay Act, it would raise the threshold to that suggested in 2016.
• The bill was reintroduced June 2019.

A New Final Rule in 2020

Secretary Acosta resigned in July 2019 and was replaced by Acting Secretary Patrick Pizzella. On September 24, the new final rule was issued and it will take effect on January 1, 2020. These are the first changes to the overtime thresholds since 2004, and make an estimated 1.3 million workers newly eligible for overtime. Major changes to wage and salary thresholds include:

• The "standard salary level" was raised from $455 to $684 per week (equivalent to $35,568 per year for a full-year worker).
• The total annual compensation level for "highly compensated employees (HCE)" was raised from $100,000 to $107,432 per year.
• Employers may use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices.

Time to Change

Now that the final rule goes into effect in just under two months, all employers will need to make adjustments, even if they did so voluntarily when the initial changes were suggested. It’s worth noting that even though the federal threshold is $35,568, some states have increased their salary threshold, minimum wage or both in 2020. For example, in California, employees earning a minimum of $54,080 (at businesses with 26 or more employees, or $49,920 for those with fewer) are considered exempt. In Maine, minimum wage and salary threshold for exempt employees will rise to $12 an hour and $36,000, respectively. And the Ohio minimum wage from 8.55 to 8.70 starting January 1, 2020. As always, watch your state’s department of labor for changes to wage and hour laws (find your state here).

Remember that threshold is only one of three “prongs” for determining exemption: salary basis, salary level and the duties test.  Exempt employees will:

• Earn a regular salary that doesn’t change based on how much or how well they do their job
• Earn not less than $35,568.00 annually or $684.00 per week
• Meet the requirements of the DOL’s duties tests

As we’ve said before, it’s illegal to misclassify employees, knowingly or not, so compliance is vital. Cover yourself: clearly distinguish exempt from non-exempt jobs, especially in written job descriptions.

The FLSA Final Rule on overtime exemption may be resolved, but HR matters are always bound to change over time. One thing’s for sure: Horizon Payroll Solutions can help you stay up-to-date and in compliance. Contact us today!

Originally published May 2, 2018; Updated on 10/15/2019 for relevancy.