On January 1, 2020, a final rule issued by the United States Department of Labor on September 24, 2019, became effective raising the level for overtime for otherwise exempt employees from the $455.00 per week ($23,660.00 per year) level that has existed for over fifteen years to $684.00 per week or $35,568.00 per year.
A prior attempt by the Department of Labor to raise the minimum salary threshold stopped by the court
This new regulation follows an earlier attempt by the Department of Labor under the Obama Administration to raise the minimum salary for overtime to $913.00 per week or $47, 4776 per yea.r See Agency Checklists’ article of May 24, 2016, “New Law Sets $47,476 As Minimum Salary for Overtime.”
Before this rule took effect, twenty-one Republican state attorney generals and fifty-five business organizations, including the Independent Insurance Agents & Brokers of America (Big “I”), filed a suit opposing this doubling of the minimum overtime salary from $455.00 per week to $913.00. The federal court in Texas hearing the opponents of the rules’ case invalidated the regulation. Please see Agency Checklists’ November 27 article: Federal Judge Stops New $47,476 Minimum Salary Law for Overtime Taking Effect. Although the Department of Labor appealed, a change of administration resulted in this appeal being held in abeyance pending further rulemaking regarding a revised salary threshold.
While some commentators predicted that even this new watered-down rule would engender lawsuits contesting its provisions, so far, none of the states or business organizations that contested the 2016 rule have filed any lawsuits opposing the new rule.
The minimum level of earnings increased thirty-three percent effective January 1, 2020
The Department of Labor’s final rule updates the overtime regulations that define whether executive, administrative, and professional employees, so called “white-collar workers,” are protected by the Federal Fair Labor Standards Act (“FLSA”) as to minimum wage and overtime payment laws.
The insurance industry has most of its employees within the general category of white-collar workers under FLSA’s provisions.
The new rule, effective January 1, 2020, raised the minimum amount full-time salaried white-collar workers must earn before an employer can claim a legal exemption from paying overtime by approximately thirty-three percent.
The new rule provides that a white-collar worker must earn $684.00 per week or $35,568.00 annually before an employer can claim a legal exemption from paying overtime. Before this final regulation took effect, if a white-collar worker earned less than $455 per week, they had the right to receive overtime pay regardless of any white-collar exemption applicable. (See below for more details on this exemption).
Under federal law, an employer must pay overtime at time-and-a-half unless the employee is exempt
The federal overtime provisions contained in FLSA state that, unless exempt, employees must receive overtime pay for hours worked over forty in a workweek at a rate not less than time and one-half their regular rate of pay.
The new rule does not change the basic law that employees entitled to overtime must earn one and one-half their regular rate of earning. For non-exempt employees, overtime may apply up to a limit of $107,000 per year before they become classified as “highly compensated employees” under the regulation.
The new seventy-nine-page rule, published in the Federal Register on September 27, 2019, focuses on the “unless exempt” exception that applies to minimum wage and overtime pay for executive, administrative, professional, outside sales, and computer employees. The common name for these exemptions is “white-collar” exemptions.
Employees presently working under the white-collar exemption have no right to overtime for work of more than 40 hours
FLSA’s white-collar exemption excludes certain executive, administrative, and professional employees from federal overtime requirements. Under the new rule to qualify for an exemption, a white-collar employee performing administrative duties, the category most applicable to Agency Checklists’ reader base, has to:
- be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week; (This number only applies after January 1, 2020).
- their primary duty had to be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and
- their primary duty had to include the exercise of discretion and independent judgment concerning matters of significance.
Under rule now in effect, an exempt white-collar employee has a right to time-and-a-half pay when they put in more than 40 hours a week if they earn less than $35,568.00 a year ($684.00 a week).
The new rule requires time-and-a-half pay for exempt employees working more than 40 hours per week if they earn less than $35,568.00 per year ($640.00 a week).
Presently, white-collar workers earning between $23,660.00 a year and $35,568.00 a year may be classified as exempt because their primary duties fit within the executive, administrative, and professional services excluded by FLSA. As of January 1, 2020, these same workers automatically become eligible for overtime simply because the annual salary falls below the minimum required for the white-collar exemption to apply.
Of course, some employers rather than paying overtime, may decide to raise a white-collar employee’s annual compensation over the $35,568.00 minimum to avoid accounting for and paying overtime. Also, other employers may choose to limit an employee’s weekly hours to less than 40 hours to avoid paying overtime.
Employee benefits do not count, but some bonuses do, under the new rule
On December 12, 2019, the Labor Department issued for the first time in fifty years, a rule on calculating benefits in calculating an employee’s “regular rate” of pay under FLSA.
This final rule effective January 15, 2020, provides that employers may exclude from the calculation of an employee’s rate of pay for overtime purposes:
- the cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access, and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
- payments for unused paid leave, including paid sick leave or paid time off;
- payments of certain penalties required under state and local scheduling laws;
- reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit;
- certain sign-on bonuses and certain longevity bonuses;
- the cost of office coffee and snacks to employees as gifts;
- discretionary bonuses; and,
- contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.
Also, under the new rules, employers may use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, they must make such payments on an annual or more frequent basis.
Labor Department believes the new rule will give 1.3 million workers the right to overtime
The Labor Department estimates that 1.3 million exempt employees who currently earn a weekly salary of more that $455.00 but less than $684.00 per week will become entitled to overtime protection under the new rule.
A pledge to update the earning thresholds regularly going forward
While the invalidated 2016 rule provided a mechanism for automatically updating the salary and compensation levels every three years to maintain the earning levels without regard to inflation, the new rule has no similar provision. However, in promulgating the new rule, the Labor Department noted:
Experience has shown that fixed earning thresholds become substantially less effective over time. Additionally, lengthy delays between updates necessitate disruptively large increases when overdue updates finally occur. Accordingly, in the final rule [effective January 1, 2020], the Department reaffirms its intent to update the earnings thresholds more regularly in the future through notice-and-comment rulemaking.