New Department of Labor Overtime Rules

Timothy Higus

Associate Editor

Loyola University Chicago School of Law, JD 2022

In September, the Department of Labor announced a final revised “Overtime Rule” set to take effect on January 1, 2020, that raises the “standard-salary level” from $455 to $684 weekly to an annual total of $35,568. This will entitle anyone making less than this standard salary to receive fifty percent more in hourly wages for any hours worked in excess of forty in one week because they are no longer “exempted” from the overtime pay requirement in the Fair Labor Standards Act. The Rule is expected to allow 1.3 million previously-exempt workers access to overtime pay. Workers who make more than this threshold can still receive overtime pay if their roles do not include substantial decision making such as administrative, professional, or executive jobs.

History of contention

Section 13 (a)(1) of the Fair Labor Standards Act was first promulgated in 1938 during the New Deal to encourage businesses to hire an extra employee instead of making one work for 80 hours a week. The current standards were set by the Bush administration in 2004, and the new Rule recognizes, though does not practically address, the need to update the standards frequently enough to reflect the evolving wage market. This revision is only the second update to overtime policy since 1975. The Obama administration tried to update the standards in 2016 to include a 3-year review provision but was met with significant push back from the courts, business organizations, and republican Attorney Generals. Most notably, the U.S. District Court for the Eastern District of Texas enjoined the Department against implementing or enforcing the 2016 revision weeks before it was set to take effect.

In addition to an automatic update, the Obama Rule revision proposed a salary threshold of $47,000 which would have made overtime available to four million additional workers. In 1975, the threshold granted over sixty percent of salaried employees’ overtime, whereas the Obama threshold would have affected a third of employees. The new Rule will represent fifteen percent of workers, an increase from the seven percent of workers currently eligible.

Exempt and nonexempt employees

All employees are classified as either exempt or nonexempt which is an important distinction under the Fair Labor Standards Act because it determines who is eligible for overtime pay. The Act includes three tests to determine whether an employee is to be considered exempt and nonexempt. The salary level test, the first of three, requires nonexempt employees to make less than the new threshold of $684 per week. The new Rule changes this threshold from the $455 weekly threshold in the previous rule and makes more workers eligible for overtime. The second is the salary basis test where employees are exempt from overtime pay if they receive a predetermined salary regardless of the number of hours worked. The third test is the duties test, where workers are exempt from overtime if they supervise two or more employees, perform intellectual duties requiring specialized education, or perform support for significant operations and have satisfied the other two tests for exemption. The second and third test will not change under the new Rule.

Fluctuating workweeks and bonus pay

To help employers comply with these new standards, they may use nondiscretionary bonuses and incentive pay in their calculations to meet the new standard salary level. This “fluctuating workweek” provision was unavailable under the 2011 Obama-era regulations. Under earlier versions of the Act, bonuses and premium pay were not included in the weekly salary calculations for overtime pay because the Department was concerned employers would use this provision to shift money from regular salaries to incentive payments. The new Rule allows for this calculation, benefitting workers whose hours shift widely from week to week.

Implications for business compliance

Because so many people may now be eligible for overtime payments under the new Rule, it is important for companies to consider the impact of the new Rules on their current compensation structure. This increased availability of overtime benefits may lead to increased litigation for unpaid overtime if companies are not in compliance with the new regulation. Luckily, many companies did this in preparation for the 2016 rules before they were enjoined.

Employers should consider the employees who are classified as exempt but making between the 2004 and the new wage threshold. Businesses may either raise those employees’ wages to the new exempt level or begin paying a premium for overtime hours. However, employees still need to meet the full three-part test, not only the salary component. The Department also raised the salary line from $100,000 to $107,432 for highly compensated employees. These are employees who do non-manual office work and regularly perform at least one administrative, executive, or professional duty. Companies will need to evaluate whether employees in the gap between the two will meet the full exemption test and not just the relaxed highly-compensated test. Companies may decide to look at each employee’s status of exempt or nonexempt and make necessary changes to employee’s status in conjunction with the role out of the new regulation.