In the last quarter of 2019, the U.S. Department of Labor issued two new rules regarding overtime and non-exempt employees under the Fair Labor Standards Act (FLSA). The rules mark the first significant update to the regulations governing regular rate requirements under the FLSA in over 50 years.

Employers will want to learn about these new developments to ensure compliance with the FLSA. Read on to find out what changes have been made and how they may affect your business.

Federal Overtime Rules and Regulations

The FLSA governs wages, labor standards, and overtime pay. The U.S. Department of Labor is responsible for overseeing FLSA compliance. Because they occasionally issue new rules, it’s important for employers to stay up to date with changes.

Generally speaking, the overtime provisions of the FLSA require employers to pay non-exempt employees 1.5 times their regular pay for any hours worked beyond 40 in a regular workweek. The FLSA also sets rules on the types of employees who can be considered exempt (and therefore not subject to the overtime rules). The new rules directly impact how these employees are classified – meaning employees who were previously considered exempt may need to be reclassified.

Changes to the Earning Threshold for Exempt Employees

In September 2019, the Dept. of Labor announced a new rule that will make 1.3 million more employees eligible for overtime pay. The final rule updated the earnings threshold necessary to exempt executive, administrative, and professional employees from the FLSA minimum wage and overtime pay requirements.

Here are four key components of the new rule, which went into effect January 1:

  1. The rule raised the “standard salary level” from $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker);
  2. Raised the total annual compensation requirement for “highly compensated employees” from $100,000 per year to $107,432 per year;
  3. Allows employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10 percent of the standard salary level; and
  4. Revised the special salary levels for workers in U.S. territories and the motion picture industry.

In plain language, this means that employees who make less than $35,568 are now eligible for overtime pay (up from the previous threshold of $23,660). To be “exempt” from overtime rules under the FLSA, employees must be paid a salary of at least the threshold amount and meet certain duties tests. If they are paid less than the salary threshold or do not meet the duties tests, they must be paid 1.5 times their regular hourly rate for hours worked in excess of 40 hours in a workweek.

The new rule is expected to require reclassification of more than a million previously exempt workers to nonexempt status and raise pay for others above the new threshold.

Changes to the Regular Rate of Pay Calculation

In December 2019, the Dept. of Labor announced a second rule change designed to encourage employers to provide perks and benefits to their employees. The FLSA has always defined what forms of payment an employer can include for purposes of calculating an employee’s threshold salary and overtime rates.

Previously, the rules left employers uncertain about the role that perks and benefits play when calculating the regular rate of pay. This new rule clarifies which perks and benefits can be included in the regular rate of pay and which must be excluded.

The following perks are now excluded from an employee’s regular rate of pay and cannot be used to meet the standard salary level for exemption from FLSA:

  • Parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts, tuition benefits, and adoption assistance;
  • Payments for unused paid leave;
  • 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;
  • Sign-on and longevity bonuses;
  • Office coffee and snacks provided for employees;
  • Discretionary bonuses; and
  • Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense

What This Means for Employers

To make sure you and your business don’t get penalized for violating these new rules (remember: the FLSA is one of the few employment statutes that can impose personal liability on owners and managers), a thorough review of your employees’ compensation and job duties is recommended. Start by reviewing employees that are now earning below the threshold. Consider whether it’s worthwhile to give them a raise (raising them above the earnings threshold and qualifying them as an exempt employee) or if it will be wiser to pay them overtime, as needed.

If, for instance, you have an employee who is paid an amount near the threshold whom you often rely on for more than 40 hours a week, it will likely make good financial sense to offer them a raise and retain the exemption from FLSA overtime rules.

Once salaries have been analyzed, it’s worth clarifying employee duties as well to ensure they comply with exemption “duties tests.” The duties tests impose rules for the types of employees that can be declared exempt beyond their salary level.

For an employee to qualify for exemption, they must perform certain functions. In general, employees can be classified as exempt if they perform administrative non-manual work, have decision-making authority on significant business matters, have authority to hire or fire employees, or have specialized professional knowledge (like lawyers, doctors, scientists, and professors). Creative professionals and outside sales professionals may also qualify for exemption.

If you do end up reclassifying employees, make sure you start tracking employees’ time so overtime pay can be correctly calculated for all hours worked beyond 40. Employers should clarify that any reclassifications are based on new government rules and not to be construed as demotions.

To learn more about the new rules or obtain assistance making changes, contact our office for more information. Our attorneys are available to assist employers and business owners in complying with all relevant federal, state, and local laws.

Keith Clouse

About Keith Clouse

Keith Clouse is an employment law specialist with over 25 years of experience representing senior-level and C-suite executives, business owners, physicians, and corporations in complex employment litigation, arbitration, and negotiations. High-level business executives, physicians, and other professionals consistently rely on Mr. Clouse for employment law expertise and advice on employment contracts, covenants not to compete, severance agreements, equity awards, trade secret disputes, and breach of fiduciary duty claims. He is Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization. He can be reached at keith@clousebrown.com.

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