In order for an employee to be classified as exempt from payment of overtime, the employee must be paid at a specific salary level and must meet legally specified duties tests under both state and federal law.
Last September, the U.S. Department of Labor issued a final rule which will increase the salary requirements that must be met to classify an employee as exempt under the federal Fair Labor Standards Act and its corresponding regulations (“Final Rule”). The existing salary requirements have been in effect since 2004 and are outdated. The Final Rule will go in to effect on January 1, 2020. If employees do not meet the new salary requirements on and after that date, they will no longer meet the requirements for exempt status and must be paid overtime pay for any hours worked in excess of 40 in a workweek.
The Final Rule increases the weekly salary level that must be met to classify an employee as an exempt executive, administrative, or professional employee from $455 per week to a new level of $684 per week. This equates to an increase in the minimum annual salary for exempt executive, administrative, or professional employees from $23,660 annually to $35,568 annually.
This same salary requirement applies to employees who fall under the computer employee exemption. Up to 10% of the salary requirement may be met through payment of non-discretionary bonuses, incentives and commissions, provided that these are paid to employees at least annually. Employers may make a catch-up payment of incentive pay (subject to the cap) at the end of the year (defined as any 52-week period designated by the employer) to boost the employee’s salary to the required level. The catch-up payment must be made within one pay period of the end of the designated 52-week period. It will count only toward the prior year’s salary amount and not toward the salary in the year in which paid.
Although not applicable to most employers in Wisconsin, the Final Rule also increases the annual salary requirement that is applicable to the federal exemption for highly compensated employees from $100,000 to $107,432 annually. The Final Rule also contains changes to the salary requirements for employees in U.S. territories and the motion picture producing industry.
The Final Rule contains no provision for automatic adjustments to the salary levels in future years. However, the Department of Labor recognizes the need for periodic adjustments and has indicated its intent to update the salary thresholds more regularly through its standard notice and rulemaking process.
This is an area of labor law in which most employers are subject to, and must comply with, both state and federal overtime exemption laws and regulations. There is no concurrent change in the salary thresholds under Wisconsin law. Moreover, the Final Rule does not make any changes to the duties tests, which employees must also meet to be classified as overtime-exempt under both state and federal law. Employers must continue to consider both federal and state law in determining whether their employees qualify for exempt status.
All employers must be in compliance with the new salary requirements of the Final Rule on January 1, 2020. Employers should be evaluating their exempt workforce now to determine if the salaries of those employees meet or exceed the increased salary thresholds. If salaries are below the new salary thresholds, employers will need to determine what changes they will make to ensure compliance with the Fair Labor Standards Act and its corresponding regulations. This is also a good time for employers to revisit the duties tests to ensure that their exempt employees also have the duties required to be classified as exempt under those tests.
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