The U.S. Department of Labor (DOL) on Sept. 24, 2019, announced a final rule raising the annual minimum salary requirements for the Fair Labor Standards Act (FLSA) overtime exemptions for executive, administrative, and professional employees. The final rule, effective Jan. 1, 2020, will significantly impact businesses. Experts predict the rule could result in the reclassification of as many as 1.3 million currently exempt employees as non-exempt.

Under the final rule, the salary level for these “white collar” exemptions will increase from $23,660 per year ($455 per week) to $35,568 per year ($684 per week). In this respect, the final rule increases the salary level a few dollars per week more than the original rule proposed on March 7, 2019. The final rule will also raise the annual compensation requirement for an employee to be considered a “highly compensated employee” and exempt from overtime from the current $100,000 per year to $107,432 per year, significantly less than the $147,414 per year in the proposed rule. Finally, the rule allows employers to use nondiscretionary bonuses and incentive payments and commissions paid at least annually to satisfy up to 10% of the standard salary level.

The DOL did not, however, make any changes to the duties test. In addition, the DOL did not enact automatic adjustments to the salary threshold, nor did it create differing salary levels based on region or size of employer. Meeting the salary threshold does not alone make an employee exempt. The employee must remain engaged in executive, administrative, or professional duties, or be part of another exempt status.

There are options for businesses that employ individuals currently exempt from overtime requirements because they earn more than $23,660 per year ($455 per week) but less than $35,568 per year ($684 per week). If the employee’s earnings are closer to the higher threshold, the employer may consider simply increasing the employee’s salary to be above $35,568 per year, so the employee remains exempt. This could be less expensive than reclassifying these employees as non-exempt and paying overtime. Alternatively, for those employees for whom a raise is not practical, employers may consider mitigating overtime costs by imposing and enforcing strict no-overtime policies or reducing employees’ hours to decrease the likelihood of overtime.

Employers should not wait until Jan. 1, 2020, the effective date of the new rule, to audit and review their employee classifications. Rather, employers should begin the process now to be prepared for the implementation of this significant new rule.