Department of Labor Finalizes New Overtime Rule

Employment and Labor Alert

(by Stephen Antonelli and Brian Lipkin)

As we previously reported, the United States Department of Labor (DOL) has been considering changes to the overtime laws.  Last week, the DOL finalized a new overtime rule, which takes effect on January 1, 2020.  Here are the biggest changes:

Higher Salary Threshold.  The new rule raises the salary threshold that exempts certain executive, administrative, professional, and outside sales employees from overtime.  Under the new rule, these employees will need to earn a salary of at least $35,568 per year ($684 per week) to be classified as “exempt” from overtime.  This is an increase from the current salary threshold of $23,660 per year ($455 per week).

Changes for Highly Compensated Employees.  Under the existing federal overtime rules, certain “highly compensated” employees, who earn a salary of at least $100,000 per year, are also exempt from overtime.  The new rule increases to $107,432 per year the minimum salary for employees to qualify as “highly compensated.”  (Pennsylvania does not recognize the highly compensated employee exemption, so this change may only affect employers in other states.)

Handling of Bonuses.  The new rule will allow employers to count nondiscretionary bonuses and incentive payments, which are paid at least once per year, toward up to 10% of the salary threshold.  For example, an employee who earns a salary of $33,000 per year and a nondiscretionary bonus of $3,000 per year satisfies the salary threshold under the new rule.

If the new rule takes effect, it will be the first increase in the salary threshold since 2004.  There is a still a chance, though, that a court will be asked to block or the delay the rule.  This happened in August 2017, when a federal judge in Texas struck down the DOL’s previous attempt to increase the salary threshold.

The new rule does not affect the job duties tests, which determine whether employees who meet the salary threshold qualify for the executive, administrative, professional, or outside sales exemptions.

The DOL estimates that an additional 1.3 million employees will become eligible for overtime under the new rule.  We recommend that employers take the following steps:

Identify employees who may become eligible for overtime.  Before January 1, 2020, employers should consider the rule’s impact on employees who earn salaries between $23,660 per year (the current threshold) and $35,568 per year (the new threshold). If employers don’t take any action, these employees will become eligible to earn overtime if they work more than 40 hours per week.  For employees who earn slightly below the new salary threshold, it may be more cost-effective for employers to provide a raise to $35,568 per year in order to avoid paying overtime. Employers outside of Pennsylvania may wish to provide raises to another group: employees who currently satisfy the highly compensated employee exemption, who earn salaries  between $100,000 and $107,432 per year.  If these employees earn
salaries of at least $107,432 year, they will remain “highly compensated” under the new rule.

Review job duties.  Use this new rule as an opportunity to review the job duties performed by all employees who are currently classified as exempt.  Is the “primary duty” of these employees still to perform executive, administrative, professional, or outside sales work, as the DOL defines these terms?  Do the employees have written job descriptions, which accurately reflect their current duties?

Babst Calland’s Employment and Labor Group will continue to keep employers apprised of further developments related to this and other employment and labor topics. If you have any questions on how this rule will affect your business, please contact Stephen A. Antonelli at (412) 394-5668 or santonelli@babstcalland.com or Brian D. Lipkin at (412) 394-5456 or blipkin@babstcalland.com.

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