Department of Labor Announces Final Overtime Rule

At a Glance 

• Effective January 1, 2020
• Increases “standard salary level” from $455 to $684 per week (equivalent to $35,568 per year for a full-year worker)
• Increases the total annual compensation level for “highly compensated employees” (HCE) from $100,000 to $107,432 per year
• Permits employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level
• Revises special salary levels in US territories and in the motion picture industry

Introduction 

On September 24, 2019, the U.S. Department of Labor announced a final rule that will make several changes to the current FLSA overtime rule, which the agency estimates would make more than a million additional American workers eligible for overtime.  

Salary Levels 

The current standard salary level thresholds have been in place since 2004. Under the current overtime rule, employers are required to pay overtime wages to employees earning a salary below $455 per week when they work more than 40 hours within a week. The final rule includes changes to the standard salary level and certain special salary levels. Under the final rule: 

• The standard salary level will increase to $684 per week, or $35,568 per year for a full-year worker
• Maintain a special salary level of $380 per week for American Samoa
• Set a special salary level of $455 per week employees in Puerto Rico, U.S. Virgin Islands, Guam, and Commonwealth of the Northern Mariana Islands
• Maintain a special “base rate” threshold for employees in the motion picture producing industry, this will increase in proportion to the increased standard salary level, which bumps the new base rate to $1,043 per week

Other Notable Changes 

 In addition to the salary level revisions, the final rule includes other important changes, including: 

• Increase to the total annual compensation requirement for Highly Compensated Employees (HCEs) to $107,432
• Permit the use of nondiscretionary bonuses and incentive pay to satisfy up to 10% of the standard salary level,as long as the payments occur at least annually 
• Allow “catch-up” payment. In cases where an employee does not earn enough nondiscretionary bonus/incentive payin a given 52-week period to maintain exempt status; the employer may make a “catch-up” payment that is within one pay period of the 52-week period. Payment is restricted to up to 10% of total standard salary level of preceding 52-weeks and will apply to prior year salary, not the year it was paid 
• Future salary threshold updates through notice and comment rulemaking process

Next Steps 

Beginning January 1, 2020, employers must comply with the DOL Final Overtime Rule. This gives employers just over three months to make any necessary changes to meet the requirements. 

Employers should review the final rule details and make any necessary changes to ensure their compensation plans align with the finalized salary thresholds. We recommend that employers begin auditing their current compensation practices and job descriptions to determine whether there is a need to make salary adjustments to meet the new thresholds or make changes to exempt employees’ statuses.  

For more information regarding this proposed rule change including FAQs, please click here. 

Thank you for choosing Paylocity as your Payroll Tax and HCM partner. 

This information is provided as a courtesy, may change, and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor. 

Date Posted: September 30, 2019