Labor Department Issues Rule on Overtime Salary Level Eligibility

On September 24, 2019, the U.S. Department of Labor issued a Final Rule that will make an estimated 1.3 million American workers eligible for overtime pay under the Fair Labor Standards Act (FLSA). 

The new rule, which goes into effect on January 1, 2020, has the following provisions:

• The rule raises the salary exemption level from $455 per week ($23,660 annually) to $684 per week ($35,568 annually).

• The rule allows up to 10 percent of the salary level threshold to be satisfied by payment of nondiscretionary bonuses, incentives, and commissions that are paid annually or more frequently. The rule also permits employers to make an end-of-year catch-up payment if the bonuses fall short of the threshold.

• The rule raises the highly compensated employee total annual compensation level to $107,432 from the current level of $100,000. The DOL’s Notice of Proposed Rule Making issued in March 2019 proposed a higher threshold of $147,414, which the DOL abandoned in the Final Rule in response to public comments.

• The rule does not contain a mechanism to automatically adjust the salary-level threshold.

As a result, future increases will require further rulemaking. The absence of an automatic adjustment provision represents a significant change from the Obama Administration’s 2016 Final Rule.

• The new rule imposes a different, lower salary level exemption threshold of $455 per week in the U.S. territories ($380 per week in American Samoa).

• The rule also creates an exemption from the salary basis test for the motion picture producing industry in certain limited circumstances.

The implementation of this Final Rule has a lengthy political and legal history. In 2016, the Obama Administration issued a Final Rule that raised the salary level exemption threshold to $913 per week ($47,476 annually), an increase that would have extended overtime pay eligibility to approximately four million workers. That rule was scheduled to go into effect on December 1, 2016.

A few days before the effective date, a federal judge in Texas issued a nationwide injunction prohibiting the DOL from implementing the rule, holding the DOL had exceeded its authority by enacting an increase at that high of a salary level.  The 2016 Rule has been held in abeyance in the Fifth Circuit Court of Appeals for the past two years, pending issuance of a new Final Rule by DOL that supersedes the 2016 Rule.

The new rule may be a disappointment for those employees who would have been eligible for overtime under the 2016 Final Rule but fall outside the scope of the 2019 salary level threshold. Nevertheless, the new rule will extend overtime pay eligibility to approximately 1.3 million workers, and employers will not be paying the estimated 33 percent more per week they would have been paying under the 2016 Final Rule.

According to an analysis of the new rule conducted by Paychex, the industries most heavily affected likely will be educational services, accommodation and food services, wholesale and retail trade, and arts, entertainment, and recreation.

Employers have a little more than 90 days within which to determine whether those employees earning less than $35,568 annually will be given a raise or will be paid overtime. If the latter, employers should prepare to maintain time worked records for those newly converted hourly employees.

Nyemaster Goode’s Labor & Employment practice area regularly counsels employers in regard to wage-hour issues and the application and interpretation of the Fair Labor Standards Act, the Iowa Wage Payment Collection Act, the Equal Pay Act, non-discrimination in wage laws, and applicable regulations.

Clients with questions regarding implementation of the new salary level threshold for overtime eligibility should contact one of our labor and employment attorneys at 515.283.3100.