In March 2019, the Department of Labor (DOL) issued a Notice of Proposed Rulemaking that signaled its intent to increase the annual salary threshold applicable to the Fair Labor Standards Act (FLSA)'s “white collar” exemptions (e.g., executive, administrative, and professional).  Employees whose salary exceeds this annual salary threshold are exempt from certain FLSA provisions, including minimum wage and overtime laws, so long as the employees also meet the duties’ requirement associated with the exemption.

On September 24, 2019, the DOL announced a final version of the rule, set to take effect on January 1, 2020. Under the final rule, the annual salary threshold will increase from $455 per week to $684 per week, or $35,568 on an annual basis.  The last increase to annual salary threshold was in 2004.  For employers, this new threshold means that employees who are currently exempt and receive a salary of less than $684 per week will, in most cases, become non-exempt employees under the FLSA beginning on January 1, 2020.  This leaves employers just over three months to ensure their employees meet both the salaried and duties tests to continue to be properly classified as exempt in time for the New Year.

The final rule offers employers the option of using nondiscretionary bonuses and incentive payments, which include commissions, to account for up to 10% of the salaried basis threshold, thereby lowering the guaranteed weekly salary that an employee must be paid.  If an employee does not earn enough through nondiscretionary bonuses or incentive payments in a given year to maintain his or her exempt status, the employer may choose to make a one-time payment to cover the difference, as long as that payment is made within one pay period of the end of the employee’s 52-week pay year.  This one-time payment can be up to 10% of the employee’s total salary over the 52-week pay year, but it only counts towards an employee’s exempt status for the prior year.

The final rule also modifies the total annual compensation threshold for Highly Compensated Employees (HCEs), who are subject to less stringent requirements under the FLSA’s overtime provisions.  The current threshold is $100,000 per year, but on January 1, 2020, it will increase to $107,432.  Notwithstanding overall compensation, HCEs must also be paid the new minimum weekly salary of $684.

Employers with employees working in U.S. territories will also see their salary requirements increase.  The new rule sets a special salary level of $455 per week for employees in Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.  American Samoa’s special salary level will remain at $380 per week.

Employers should remember that both California and New York already impose higher salary thresholds to meet their state law exemptions. Employers should also watch for an increase in Washington state before the end of the year and keep an eye on Pennsylvania, which is also considering legislation to raise the salary threshold.

The new rule can pose some daunting challenges for employers whose currently-exempt employees will be impacted by the new salary thresholds.