Remember last January and the salary threshold change the Department of Labor rolled out for salaried exempt and highly compensated employees under the FLSA? As the end of the year approaches, you might need to revisit the DOL’s salary threshold increases that took effect January 1, 2020. In January, we anticipated that this would be one of the more consequential developments of 2020 in the employment sphere, but as you know, a pandemic arrived, and we were wrong. Since January feels like it was five years ago rather than 12 months, here is your refresher on the salary threshold increases and steps you should take now if you want to try to maintain an employee’s exemption but his or her pay falls short of the threshold.
The FLSA’s Salary Threshold Increase
In late 2019, the Department of Labor’s Wage and Hour Division issued a final rule regarding the threshold amount of salary necessary to exempt an employer from the obligation to pay overtime. The threshold since 2004 was $455 per week or $23,660 per year. In 2016, the Obama administration proposed a change to that rule to increase the threshold to $47,476. Litigation ensued, and a federal court in Texas issued an injunction, upheld by the Fifth Circuit, putting a hold on that rule.
The Trump administration rolled out a revised rule that took effect January 1, 2020. That rule raised the salary level for employees under the executive, administrative, or professional categories to $684 per week or $35,568 per year. That means that if an employee is paid a guaranteed weekly salary of that amount or more, they may qualify to be exempt from overtime under those executive, administrative or professional categories if they meet the duties requirements as well.
In addition to increasing the salary threshold in those categories, the new rule also raised the total annual compensation level necessary to meet the “highly compensated” exemption from overtime. The new level is $107,432 per year.
It is important to note that the amount of salary is not the ONLY thing that has to be shown to qualify for these exemptions. Employers still must meet the duties requirements under each exemption category (which is a much lower standard under the highly compensated exemption but should still be considered).
What Should I Do Now?
Numerous employers had already decided to follow the Obama administration’s rule and had adjusted their exempt thresholds to the $47,476 amount. If you are one of those employers, you are all set.
If you did not raise employees to the Obama-proposed thresholds, you should do a quick self-audit to make sure all of your exempt employees have met the current applicable salary threshold (and don’t forget to check your highly compensated employees as well). If you became busy with other things this year and haven’t verified those numbers but still want to maintain an employee’s exemption, it may not be too late. The new rule allows employers to use annual nondiscretionary bonuses, incentive payments, and commissions to satisfy up to 10% of the standard salary level (i.e., up to $3,556) for the exemptions (but you cannot use the 10% to meet the salary minimum under the highly compensated exemption). Further, if the employee didn’t hit the bonus mark during the year or your highly compensated employees are below the threshold, the rule authorizes catchup payments at year end to meet the salary threshold.
This catchup provision may be the most helpful for employees who you intended would meet the highly compensated exemption but did not make quite enough to meet the threshold. If at year-end these employees have not received $107,432 in compensation, you can make a payment to them during the last pay period or within one month of the end of the payroll year to reach the $107,432 requirement.
To ensure your salaried-exempt employees have in fact met the threshold, you should perform an audit now. If you identify employees who have not met the threshold, did not make enough bonus, or have a base salary more than 10% below the threshold, give your lawyer a call.