Overtime Guidance

Summary of USDOL Final Rule on Overtime
Eligibility for White Collar Employees

By: Aaron P. Cruz & Glenn Duhl

A. Summary. On September 24, 2019, the U.S. Department of Labor (USDOL) announced a final rule to make 1.3 million American employees newly eligible for overtime pay.  The final rule updates the earnings thresholds necessary to exempt executive, administrative, professional, outside sales, and computer employees from the minimum wage and overtime pay requirements of the Fair Labor Standards Act (the “FLSA”), 29 U.S.C. § 203, et seq.  The final rule also permits employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary test requirement.  The final rule is effective on January 1, 2020.

B. Background. The FLSA covers employers that are, inter alia, engaged in interstate commerce and with a gross volume of $500,000 in sales.  See 29 U.S.C. § 203(s).  The FLSA defines “employee” as an “individual employed by an employer.”  29 U.S.C. § 203(e)(1).

The FLSA requires that a covered employee be paid overtime compensation at a rate of not less than one and one-half times the “regular rate” of pay for all hours worked over 40 hours in a workweek. 29 U.S.C. § 207.  Overtime must be computed for each workweek.  If an employee works 30 hours one week and 50 the next, the employer is required to pay the employee overtime compensation for 10 hours for the second week.  29 C.F.R. § 778.104.  This requirement applies whether the employee is paid on a weekly, bi-weekly, monthly, or other basis.  29 C.F.R. § 778.104.

The FLSA provides an exemption to overtime compensation requirements for executive, administrative, professional, outside sales, and computer employees.  29 U.S.C. §213(a)(1), (17).  In order for an employer to claim an exemption for a particular employee, three tests generally need to be satisfied:

1. Payment on a salary basis: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed;

2. Payment of a minimum salary level: The amount of salary paid must meet a specified minimum amount; and

3. Duties Test: The employee’s job duties must primarily involve those associated with exempt executive, administrative, professional, outside sales, or computer employees. To meet the duties test, employees must fall within the following defined exemptions:

– Executive Exemption: 29 C.F.R. §§ 541.100 – 541.106: To qualify for the executive exemption, the employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and the employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

– Administrative Exemption: 29 C.F.R. §§ 541.200 – 541.204: To qualify for the administrative exemption, the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

– Professional Exemption: 29 C.F.R. §§ 541.300 – 541.304: To qualify for the professional exemption, the employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. The advanced knowledge must be in a field of science or learning; and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.  To qualify for the creative professional employee exemption, the employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.  See 29 C.F.R. § 541.302.

– Outside Sales Exemption: 29 C.F.R. §§ 541.500 – 541.504: To qualify for the outside sales exemption, the employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and the employee must be customarily and regularly engaged away from the employer’s place or places of business.

– Computer Employees Exemption: 29 C.F.R. §§ 541.400 – 541.40: To qualify for the computer employees exemption the employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below. The employee’s primary duty must consist of:  1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; 2) The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; 3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or 4) A combination of the aforementioned duties, the performance of which requires the same level of skills. [1]

C. Final Rule Overtime Changes (Effective January 1, 2010)

1. Minimum Salary Level:

– Standard Salary Level: The final rule increases the standard salary level to $684 per week, up from the currently enforced level of $455 per week.  This is equivalent to $35,568 annually for a full-year worker.  An employee must be paid this amount to qualify for the executive, administrative, professional, outside sales, and computer employee exemptions to the overtime compensation requirement.  Computer employees may also qualify for the exemption if they are paid on an hourly basis of at least $27.63.

– Highly Compensated Employees: The final rule also increases the total annual compensation requirement for highly compensated employees to $107,432 per year.  This is up from the currently enforced level of $100,000.  Highly compensated employees are defined as employees with a primary duty of office or non-manual work who customarily and regularly perform at least one of the exempt duties of a bona fide executive, administrative, or professional employee.  29 C.F.R. § 541.601. If an employee’s total compensation in a given annual period fails to meet the $107,432 threshold, an employer may make a “catch-up” payment within one month of the end of the annual period.  Any such catch-up payment counts only toward the prior year’s total annual compensation.  If such a catch-up payment is not made within the one-month period, the exemption does not apply and overtime premium pay must be paid in any week the employee worked more than 40 hours.  If the employee worked for less than a full year, the exemption may still apply to the employee if the employee receives a pro rate portion of the required annual compensation, based on the number of weeks of employment.

– Special Salary Level: The final rule also revises the special salary levels for workers in certain U.S. territories and in the motion picture industry.  A special salary level of $455 per week applies to Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.  A special salary level of $380 per week applies to the American Samoa.  As to the motion picture industry, the minimum salary level is $1,043 per week or a prorated amount based on the number of days worked.

2. Nondiscretionary Bonuses and Incentive Payments: The final rule permits employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard or special salary level.[2] For example, employers may use such payments to satisfy up to $68 of the $684 per week standard salary level.  Nondiscretionary bonuses and incentive payments may also be counted toward the $107,432 annual compensation requirement for highly compensated employees, but the employer must pay at least the full standard salary level of $684 per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments.

For employers to credit nondiscretionary bonuses and incentive payments to a portion of the standard salary level test, such payments must be paid at least annually.  Any 52-week period may be used to pay the bonus or incentive payments.

If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year (52-week period) to retain his or her exempt status, an employer may make a “catch-up” payment within one pay period of the end of the 52-week period.  This payment may be up to 10 percent of the total standard salary level for the preceding 52-week period.  Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.  If the employer chooses not to make the “catch-up” payment, then the employee would be entitled to overtime pay for ay overtime hours worked during the previous 52-week period.

Sources:
https://www.dol.gov/whd/overtime2019/overtime_FR.pdf
https://www.dol.gov/whd/overtime2019/overtime_FAQ.htm
https://www.dol.gov/whd/overtime2019/overtime_FS.htm
https://www.dol.gov/whd/overtime2019/overtime_complianceguide.pdf
https://www.dol.gov/whd/overtime2019/

References:
[1] Not all exemptions recognized under the FLSA apply to employees covered under Connecticut law.  Connecticut employees exempt from overtime compensation include any person employed in a bona fide executive, administrative or professional capacity as defined under Connecticut regulations, in addition to any person employed in the capacity of outside salesman as defined under the regulations of the FLSA.  Conn. Gen. Stat. § 31-76i(e)–(f).  Computer employees are not exempt under Connecticut law.

[2] Nondiscretionary bonuses and incentive payments are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company.  These are in contrast to discretionary bonuses, which are generally paid without prior contract or promise and at the employer’s sole discretion.