Employer's Guide to the Federal Overtime Salary Threshold Increases

Introduction

You may remember that back in 2016, the Department of Labor had announced amended changes to the FLSA that were going to increase the exempt employee overtime salary threshold from where it currently stands at $455 a week to $913 a week. Effectively, it was going to more than double that. Those changes were set to take effect on December 1, 2016. But about a week or two before they were set to take effect, a federal judge in Texas struck it down and the whole thing was off. At that point, the DOL took a step back and basically said, okay we're gonna reevaluate everything, we still want to increase this threshold but we're not sure how much or when, and we're gonna take this as a process to look at everything, listen to comments, and do our due diligence.

Well three years later approximately in March of 2019, the Department of Labor came back with an amended proposal to increase the overtime salary threshold limit. They also opened it up for a bunch of public comments from employers and employees. Its been said that the Department of Labor received over 116,000 public comments. And in September of 2019, the Department of Labor has announced once again, a revised change to the exempt employee federal overtime salary threshold. The current limit of $455 a week, approximately $23,000 per year, is set to increase to $684 per week, approximately $35,500. That is the new threshold now set to take effect on January 1, 2020.

This means employers need to one, understand the law and some of the other sub-components that are related to these changes, but they also need to understand how to act in the best interest of their business and their employees. This may mean that some employees who currently earn a salary that is below the new threshold of $35,500, may need to suddenly become hourly employees and have their time tracked, because as we know if they fall below the threshold, they need to be paid time and a half for any hours worked over 40 in a given week. Another option is to simply bump those salaries up above the threshold. Keep them at salary so that they remain exempt employees.

There are a couple of other things to consider but we created this page to provide a comprehensive resource and a place where employers can understand the law as well as their options all in one place. And that's what we did and we hope you find it valuable. So please browse the page and if you have any questions, click a link or fill out the form and we love to help you out as best we can. Thanks so much and welcome to payroll country.

What is the Overtime Rule?

The federal overtime provisions are part of the Fair Labor Standards Act (FLSA), and ensure that (unless an employee is exempt) an employer must legally pay an employee at an overtime rate not less than 1.5 times the regular rate-of-pay whenever they work more than 40 hours in a workweek. 

Currently, the FLSA allows employers to exempt some employees from overtime pay if they pass a certain salary threshold and meet a series of requirements. In order to be exempt, an employee must be: (1) "employed in a bona fide executive, administrative, or professional (EAP) capacity," (2) salaried; (3) paid more than the standard salary level threshold; and (4) satisfy a duties test.

The original “exempt employee overtime salary threshold” (last set in 2004) requires employers to pay any employees who make less than $455 a week (or $23,660 annually) an overtime rate if they work more than 40 hours in a week. The current law makes an exception for highly compensated employees (those who make over $100,000 a year) and those in certain fields such as doctors and lawyers. 

In 2016, the United States Labor Department announced a planned increase to the exempt employee overtime salary threshold, setting it at $913 per week ($47,476 annually) -- employers would now be required to pay overtime to any employee earning below that wage. 

The changes were meant to account for growth in employee earnings since the thresholds were last updated in 2004. The new threshold was set to take effect on December 1, 2016 and included a provision to update the threshold every four years. 

However, U.S. District Judge Amos Mazzant of Texas struck down the increased threshold, after more than 55 businesses challenged the rule. In response, the Department of Labor held a number of public listening sessions in order to gauge opinion. It received approximately 116,000 comments.

It took until September 2019 for the Department of Labor to complete a new set of overtime rules, which are slated to take effect January 1, 2020 and will require employers to provide approximately 1.3 million additional workers overtime pay. 

The new salary threshold is set at $684 per week ($35,568 annually), and a provision allows employers to satisfy the overtime pay requirement with non discretionary bonuses or incentive payments.

However, it should be noted that the Department of Labor did not increase salary thresholds for United States territories such as Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands -- all of which will retain the original $455 per week threshold. Additionally, American Samoa has an unchanged threshold of $380 per week. 

If the employee did not earn enough to reach the exempt status and has not been paid overtime all year, the bonus and incentive payment provision allots employers a time limit of one pay-period beyond the 52-week pay year to supplement the employee’s income to assure they reach the exemption level.

Highly compensated employees (those who make $107,432) will also automatically be exempt. 

The revised rules also include two industry specific revisions. 

Employers in the motion picture industry may exempt employees who are paid $1,043 per week if they meet the duties test for exemption. Meanwhile, computer professionals must earn at least $684 per week ($34,568 per year). Up to 10% of the salary ($68 per week) may be satisfied with non-discretionary bonuses or incentive payments. 

This time, no provision to update every four years was included -- instead, based on feedback from the public hearings, the Department of Labor decided to update the overtime rules based on economic conditions “from time to time” when instructed by congress.

The thresholds were calculated using pooled 2018/2019 CPS MORG data to represent the July 2018 through June 2019 period, and a salary of $684 per week corresponds to the 20th percentile of earnings for full-time salaried workers in the South Census Region and/or in the retail industry. The Department was operating under the notion that by using data from the South and the Retail industry, the threshold would effectively cover low-wage regions and industries.

In March of 2019, the Department of Labor proposed amendments to the FLSA to clarify the definition of “regular rate.” The law generally requires that overtime be paid at one and a half times the “regular rate” of pay -- however, in the past there has been some legal debate about whether employee perks such as sick pay, vacation time accrued, and other miscellaneous benefits also fall under the category of “regular rate” and should be accrued at 1.5x the rate as well.

The new definition would exclude the following benefits from the “regular rate” requirements: 

• Tuition programs including reimbursement, debt repayment, etc. 
• Benefit plans including accident plans, unemployment, and legal services. 
• Discretionary bonuses. 
• Reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System Regulations and that satisfy other regulatory requirements. 
• Reimbursed expenses. 
• Payments for unused leave, including paid sick leave. 
• The cost of wellness programs, such as gym access, employee discounts, and other services. 

A comment period was held between May 13 and June 12, 2019, and the Department of Labor is currently deliberating the proposal.

We Can Help

We hope you found this resource helpful in your attempt to understand the changes to the federal overtime salary threshold increase and related measures. If you have any employees impacted, this means you will either have to start tracking their time (and paying them for overtime) and/or increase their salaries to keep their employment status as exempt. 

Complete Payroll has been helping thousands of businesses navigate payroll and labor law changes for almost 30 years. If you would like some help, complete the form below and a member of our team will contact you within 1 business day.