The Long-Awaited FLSA Salary Basis Update Is Finally Here

Today, September 24, 2019, the U.S. Department of Labor (“DOL”) announced a final rule modifying the weekly salary and annual compensation threshold levels for white collar exemptions to the Fair Labor Standards Act (FLSA) overtime requirements. The final rule will become effective on January 1, 2020.  It is critical for employers to become familiar with the new regulations, among other reasons because misclassification of employees as being exempt from FLSA overtime requirements is a costly mistake.

Overview of the FLSA Salary Basis Test and Highly Compensated Employee Rules

Certain employees can be exempt from the FLSA’s overtime requirements.  The most common overtime exemptions under the FLSA are the so-called “white collar” overtime exemptions (executive, administrative, professional).  To qualify for an executive, administrative, or professional exemption, an employee must receive a minimum salary and be paid on a salary basis (“salary basis test”) and perform the appropriate duties (“duties test”).  The current weekly salary threshold of $455/week (equivalent to $23,660 per year for a full-year employee) has been in effect since 2004.  At that time, the FLSA regulations were also amended to add a new “highly compensated employee” overtime exemption for employees that make at least $100,000 annually and who can meet a less-stringent version of the duties test.

The DOL is also officially rescinding regulations it issued in 2016. Those regulations would have raised the salary thresholds even further, to $913/week for the standard threshold and $134,004 annually for “highly compensated” employees, and would have subjected both thresholds to an automatic increase every three years. However, the 2016 regulations were enjoined by a federal District Court in Texas and never went into effect.

What Are The New Key Provisions?

The newly published FLSA regulations that become effective January 1, 2020, make the following changes:

1. The weekly salary threshold level is raised from $455 per week ($23,660 per year) to $684 per week ($35,568 per year);
2. The total compensation needed to exempt highly compensated employees is increased from $100,000 annually to $107,432 annually;
3. Employers are now able to use nondiscretionary bonuses and incentive payments made at least annually to satisfy up to 10 percent of the new standard salary level.
4. The rule also revises the special salary thresholds applicable to workers in U.S. territories and the motion picture industry.

Unlike the rescinded 2016 regulations, the new final rule does not include a provision for automatic updates to the salary threshold; however, the DOL has stated it intends to propose further updates to the salary thresholds at least every four years.

The new FLSA regulations do not make any changes to the FLSA duties tests, which in general also must be satisfied for an employee to qualify for the FLSA overtime exemptions.

Below is a comparison of the current and new FLSA Salary Basis Test:

Other Pending Rulemaking

In addition to the new final rule regarding the salary thresholds, the DOL has issued proposed regulations in currently considering new rules to clarify the rules surrounding the FLSA “regular rate of pay”. These regulations are currently under consideration and open to public comment. LCW is keeping a close eye on the DOL’s rulemaking process and will publish further updates when the DOL announces its final rules.

Next Steps for Public Employers to Prepare For the New Regulations

Given that the new salary basis test threshold of $684 per week and highly compensated employee threshold of $107,432 annually will go into effect on January 1, 2020, public employers should audit all exempt job positions to determine which job positions are affected by these new salary basis test regulations.  If any exempt job positions are below or close to being below these new salary levels, employers should evaluate one of the two following options:

1. Increase the salary for the exempt job position to meet or exceed the new salary levels to maintain the overtime exemption; or
2. Convert the affected exempt job position to nonexempt status that would qualify for overtime.

If an impacted job position is to remain exempt, the employer should look to increase the salary levels to a level at or higher than the new salary levels.  Keep in mind that the effective date for these new salary levels – January 1, 2020 – is a Wednesday.  Therefore, to the extent that the relevant 7-day FLSA workweek for an affected exempt employee begins prior to that (e.g., Sunday), the employer should look to implement the increased salary level at the beginning of that workweek.

If an impacted job position will be converted to nonexempt status, the employer should carefully examine the impacts of this decision and look to take the following steps:

• Provide advance notice to the affected employee about the reclassification;
• Provide training on timekeeping and overtime policies and procedures to the affected employee and their supervisors to ensure compliance with any new overtime obligations; and
• Implement any necessary changes to the payroll system regarding the new nonexempt classification and determine what additional compensation received by the employee needs to be incorporated into the FLSA regular rate of pay for overtime calculations.

A new nonexempt employee must accurately report work hours and comply with the agency’s overtime policies and procedures.  This is critical because the FLSA imposes an affirmative obligation on employers to keep accurate time records, and requires prompt payment of wages, including overtime.  Late payment of overtime and improper calculations of overtime pay are also common and costly mistakes for employers.  Without accurate time and payroll records, the employer may face liability for liquidated damages (twice the amount of compensation due) in the event that an FLSA lawsuit is filed alleging overtime claims or liability for back wages.

For California employers, we expect that few, if any, changes will be necessary as a result of the increased weekly threshold because the threshold is still lower than the salary of virtually all public employees who will qualify under the duties test for exemption.  However, we suspect that many public agencies will have employees who will qualify for the “highly compensated employee” exemption that would not have qualified under the $134,004 threshold proposed by the 2016 regulations.  Under the “highly compensated” exemption announced today, an employee making over $107,432 does not need to meet the normal duties test, but needs only to have a primary duty of performing office or non-manual work, and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee. Public employers should look closely at positions that exceed the new “highly compensated” threshold to see if those positions can be classified as exempt. We suspect there will be positions whose annual salary exceeds $107,432, and who are currently classified as non-exempt, who will qualify for the “highly compensated” exemption announced today.

To the extent that affected job positions involve represented employees, any actions taken to change wages, hours, and working conditions may also trigger an agency’s obligation to meet and confer with the pertinent employee organization over the decision or effects and impacts of such decision. Employers are urged to consult with their legal counsel or labor relations professionals regarding the impact of any meet and confer obligations.

Even where a public employer does not have any exempt employees affected by these new salary basis test regulations, it may also be prudent to assess whether current exempt positions perform the appropriate duties to satisfy the executive, administrative, or professional exemptions.  For example, an agency can assess whether an “Analyst” position performs work directly related to the operations of the department and actually exercises discretion and independent judgment with respect to matters of significance in order to meet the duties test for the administrative exemption. (29 C.F.R. sec. 541.200(a)(2-3).)  An audit of exempt positions is also beneficial because an employer may be liable for unpaid compensation and liquidated damages going back up to three years for a willful violation of the FLSA in misclassifying an employee as overtime exempt.  (29 U.S.C. sec. 255.)

LCW’s wage and hour attorneys routinely conduct FLSA audits and provide wage and hour advice and counsel to our public agency clients and are available to advise agencies on the impact of these new FLSA salary basis test regulations.  If you have any questions about this issue, please contact our Los Angeles, San Francisco, Fresno, San Diego, or Sacramento office.