Increased Salary Thresholds for FLSA Exempt Status Expands Overtime Eligibility

By: Thomas L. Dyer & Shawna Ruetz

“Why am I not receiving additional compensation for working overtime?” 1.3 million Americans will no longer be asking themselves this question after the Wage and Hour Division of the Department of Labor submitted a Final Rule modifying the regulations pertaining to overtime exemptions.

Under the Fair Labor Standards Act (FLSA), employees working over forty hours a week are required to be compensated with overtime pay for any time exceeding that threshold unless the employee qualifies for exempt status. To qualify as exempt from overtime, an employee must meet two qualifications: (1) the employee must work in a qualified executive, administrative, or professional capacity, and (2) the employee is compensated at or above the FLSA’s “standard salary level.” Since 2004, this “standard salary level” has been $455 per week, equaling an annual salary of $23,660.

On September 24, 2019, the Department of Labor submitted its Final Rule modifying the standard salary level. The modification increases the annual salary requirement to $35,568 per year (or $644 per week). The agency estimated that the change will mean an additional 1.3 million Americans now qualify for overtime eligibility.

What will be the impact of the proposed Final Rule on employers and employees?

For Employers: Undoubtedly, this places a higher burden on employers who now have to compensate more employees at overtime rates. In order to mitigate this burden, the Department of Labor also approved a plan for non-discretionary bonuses and incentive programs to contribute to the standard salary level. Additionally, if an employee who failed to earn their non-discretionary bonus but otherwise would have qualified for the exemption, may still not receive overtime compensation for this year. Employers are permitted to make a one-time “catch-up” payment for the previous year to satisfy the salary requirements, thereby removing the employee from overtime compensation territory.

For Employees: A higher percentage of employees will receive overtime. Between 2004 and 2019, the United States observed inflation of a cumulative 35.82%. If the adjustments to the standard salary level reflected this inflation figure, the new threshold level would have been $32,135. Instead, the new threshold is actually ahead of inflation, resulting in a higher fraction of the work force qualifying for overtime compensation. Had the change simply kept up with inflation, 42% of workers would have qualified for overtime eligibility. However, when using the $35,568 level, 46% of workers now qualify for overtime compensation.

Absent litigation challenging the Final Rule, it will become effective for all employers governed by the FLSA on January 1, 2020. Also important to remember is that state laws may have more stringent wage and hour requirements than those of the FLSA discussed here. For more information on the impact of the new FLSA overtime regulation, visit our Labor & Employment page to find an attorney in your area.

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