The U.S. Department of Labor (DOL) has announced a final rule that will increase access to overtime pay under the Fair Labor Standards Act (FLSA) for approximately 1.3 million workers.  The final rule, which comes six months after DOL published a proposed rule in March, is the latest development in a years-long process by DOL, spanning the Obama Administration and the Trump Administration, to modify FLSA overtime regulations.  The new rule takes effect on January 1, 2020, giving employers just a narrow window to assess the rule’s impact on their operations.  The final rule is available here.  DOL has also published a fact sheet that provides an overview of the final rule, available here.

Overview of the Final Rule

 Under the rule currently in effect, certain white-collar workers are exempt from FLSA overtime pay requirements if they are paid on a salary basis, earn a minimum salary of at least $455 per week (annualized to $23,660), and perform specified duties.  The final rule increases the minimum salary threshold for exemption to $684 per week (or $35,568 annually).  This figure is a slight adjustment from the $679 per week threshold contained in the proposed rule.  Like the proposed rule, the final rule does not make any changes to the “duties test” for exemption; thus, there will be no change to which workers qualify as “white collar” based on the job duties they perform.

The final rule allows employers, for the first time, to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the minimum salary threshold, provided that such bonuses and incentives are paid at least once per year.  Under this formulation, employers can pay 90% of the minimum compensation threshold in the form of salary ($615.60 per week/$32,011.20 annually) and the remaining 10% ($3,556.80) in the form of nondiscretionary bonuses or incentive payments.  Employers may set any fixed 52-week period as a “year” – such as a calendar year, fiscal year, or employee work anniversary – for purposes of calculating whether the employee’s salary meets the exemption threshold.  Additionally, if by the last pay period of the 52-week period, an employee’s compensation (base salary plus bonus/incentives) has not hit the minimum salary threshold, employers are permitted to make a final “catch up” payment (up to that 10% level) no later than the next pay period following the end of the year.  Failure to timely make that catch-up payment would render the employer liable for the overtime hours the employee worked in the prior year.

The final rule also modifies the Highly Compensated Employees (HCE) test.  Under existing rules, employers may apply overtime exemptions to certain employees under a reduced duties test if they meet a higher compensation threshold.  The final rule raises that threshold to $107,432 annually.  This is a small increase from the current $100,000 threshold, and a notable departure from the $147,414 threshold in the proposed rule.

DOL has indicated its intent to update the minimum salary and other thresholds on a regular basis, although it declined to adopt the four-year update schedule set out in the proposed rule.

Practical Tips for Employers

With the new overtime rule taking effect on January 1, employers should promptly consider how the changes will impact their workforce.  As an initial matter, employers should identify whether they have exempt employees whose compensation will fall beneath the new threshold and consider adjustments.  Such employees could be reclassified as non-exempt (and thus overtime-eligible) or provided a compensation increase by the January 1 deadline to keep their salary above the minimum threshold.  If employees will be reclassified, employers should determine ahead of time how much overtime is worked by these employees in order to assess budgetary impacts.  In addition, for newly classified non-exempt employees, employers will need to carefully track hours worked and pay to ensure that employees receive all overtime compensation to which they are entitled, and employees may need training on time-keeping.  Close attention should also be paid to how use of business technology (cell phones, laptops, etc.) outside the workplace and work-related travel will impact the time worked by employees converted to non-exempt status.  Employers should also note that the new rule provides an opportunity to audit the FLSA status of all employees and coordinate any needed changes with the implementation of the new rule.

As part of any reclassification plan, employers should be alert to morale issues that could stem from converting exempt employees to nonexempt, including using care with how the changes are messaged so that employees understand they are not being demoted or otherwise suffering an adverse employment action.  Employees may also be frustrated with necessary changes to their timekeeping habits and reduced schedule flexibility, and managers may feel overburdened if they are required to take on extra work that used to be done by employees who have been reclassified.  Employers should engage with legal and human resources stakeholders to anticipate issues arising from these changes.

Employers should keep in mind that some states, such as California, continue to have stricter requirements and salary thresholds for overtime exemption than the FLSA.

As with prior changes to the overtime regulations, DOL may face litigation that attempts to enjoin or invalidate the final rule.  Employers should continue monitoring this issue at least through the implementation of the final rule on January 1, 2020.

Further background on the development of the overtime rule, including the March 2019 proposed rule, is available here.

Photo of Lindsay Burke Lindsay Burke

Lindsay Burke co-chairs the firm’s Employment Practice Group and regularly advises U.S., international, and multinational employers on employee management and culture issues and international HR compliance. She is a key member of the firm’s Institutional Culture and Social Responsibility practice, working together with…

Lindsay Burke co-chairs the firm’s Employment Practice Group and regularly advises U.S., international, and multinational employers on employee management and culture issues and international HR compliance. She is a key member of the firm’s Institutional Culture and Social Responsibility practice, working together with white collar colleagues to conduct culture assessments, internal investigations of executive misconduct, and civil rights and racial equity audits and assessments. Lindsay has been at the forefront of the changing workplace issues impacting employers in the U.S. in the last decade, including #MeToo, Covid-19, and the renewed focus on diversity, equity, and inclusion. She frequently advises employers in relation to their processes and procedures for investigating complaints of discrimination, harassment, and retaliation and trains executive teams and board members on culture risk and the lawful implementation of DEI programs.

Lindsay also guides employers through the process of hiring and terminating employees and managing their performance, including the drafting and review of employment agreements, restrictive covenant agreements, separation agreements, performance plans, and key employee policies and handbooks. She provides practical advice against the backdrop of the web of state and federal employment laws, such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Equal Pay Act, the Family and Medical Leave Act, the Fair Labor Standards Act, and the False Claims Act, with the objective of minimizing the risk of employee litigation. When litigation looms, Lindsay relies on her experience as an employment litigator to offer employers strategic advice and assistance in responding to demand letters and agency charges.

Lindsay works frequently with the firm’s privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups. She also regularly provides U.S. employment law training, support, and assistance to start-ups, non-profits, and foreign parent companies opening affiliates in the U.S.

Photo of Carolyn Rashby Carolyn Rashby

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. Carolyn’s approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.…

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. Carolyn’s approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.

As a senior member of Covington’s Institutional Culture and Social Responsibility Practice Group, Carolyn has co-led significant investigations into workplace culture, DEI issues, and reports of sexual misconduct and workplace harassment.

As an employment lawyer with over two decades of experience, Carolyn focuses on a wide range of compliance and regulatory matters for employers, including:

  • Conducting audits regarding employee classification and pay equity
  • Advising on employment issues arising in corporate transactions
  • Strategic counseling on a wide range of issues including discrimination and harassment, wages and hours, worker classification, workplace accommodations and leave management, performance management and termination decisions, workplace violence, employment agreements, trade secrets, restrictive covenants, employee handbooks, and personnel policies
  • Drafting employment contracts and offer letters, separation agreements, NDAs, and other employment agreements
  • Advising on employee privacy matters, including under the California Consumer Privacy Act
  • Providing guidance on use of AI in the workplace and development of related policies
  • Leading anti-harassment and other workplace-related trainings, for employees, executives, and boards

Carolyn also works frequently with the firm’s white collar, privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups.

Photo of Tom Plotkin Tom Plotkin

Tom Plotkin advises companies on a broad range of ESG issues with a focus on social responsibility, including business and human rights, equity and civil rights, and external engagement and brand reputation.

As a member of Covington’s Business and Human Rights practice, Tom…

Tom Plotkin advises companies on a broad range of ESG issues with a focus on social responsibility, including business and human rights, equity and civil rights, and external engagement and brand reputation.

As a member of Covington’s Business and Human Rights practice, Tom advises clients on all aspects of the corporate responsibility to respect human rights, including issues related to supply chain due diligence and responsible sourcing, downstream product use and human rights impacts, and strategies for integrating human rights oversight into broader compliance programs.

Tom is also a member of Covington’s Institutional Culture and Social Responsibility practice, where he assists companies in evaluating and managing the legal, business, and reputational risks associated with social impacts of business practices. Tom’s work in this area focuses on civil rights and diversity, equity, and inclusion.

As a member of Covington’s ESG practice, Tom draws on his social responsibility portfolio to assist companies in bridging internal practices and external engagement strategies. Tom assists with public ESG reporting, responding to shareholder ESG proposals, and external stakeholder engagement.

Tom is also a member of Covington’s Employment practice, where he advises on a range of domestic and international employment law issues.