By Michael L. Stevens and Alexandra M. Romero, Arent Fox LLP
On September 24, 2019, the Wage and Hour Division of the Department of Labor (DOL) announced a new final rule raising the salary threshold employee compensation must meet in order to qualify for exempt status under the Fair Labor Standards Act (FLSA). The rule will take effect on January 1, 2020.
Salespeople and service advisors employed by automobile dealerships typically qualify as exempt under the FLSA, which will not change as a result of the new final rule. However, the new final rule will likely impact other non-manual and office workers at automobile dealerships who may fall within the FLSA’s so-called “white collar” exemptions.
Specifically, the FLSA contains several exemptions for bona fide administrative, executive, computer-related, and other professional employees, which means that these “white collar” employees are not subject to the FLSA’s minimum wage and overtime pay requirements. Certain highly compensated employees who perform office or non-manual work are also exempt from these requirements if they earn $100,000 or more per year.
In order to qualify for one or more of these exemptions, employees must meet certain tests regarding their job duties and be paid on a salary basis at a rate no less than the minimum threshold set by the DOL. Currently, that minimum threshold is $455 per week, or $23,660 per year for a full-year worker.
The DOL’s new final rule is intended to update the FLSA’s overtime regulations to address significant wage growth that has occurred since the current minimum salary threshold was set in 2004. Specifically, the new final rule will:
- Raise the minimum salary threshold from $455 to $684 per week, which is equivalent to $35,568 per year for a full-year worker.
- Raise the minimum annual compensation threshold for highly compensated employees from $100,000 to $107,432 per year.
- For the first time, permit employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least on an annual basis to satisfy up to 10% of the minimum salary threshold, which the DOL stated was “in recognition of evolving pay practices.”
- Establish a special salary level of $380 per week for employees in American Samoa, and a level of $455 per week for employees in Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.
- Increase the special “base rate” threshold for employees in the motion picture producing industry to $1,043 per week (or a proportionate amount based on the number of days worked).
The DOL estimates that these changes will require the re-classification of approximately 1.3 million currently exempt employees who will no longer qualify for the exemption and must receive overtime pay as a result. The DOL also noted that the final rule received broad-based support during the rulemaking process on the basis that increases to the salary thresholds were necessary given the length of time that has passed since they were last updated in 2004. During the last months of the Obama administration, the DOL issued a new rule that would have more than doubled the current salary threshold from $455 to $913 per week, which was invalidated by a federal district court in Texas and subsequently appealed to the federal Court of Appeals for the Fifth Circuit. That appeal has been on hold, and will likely be considered moot in light of the DOL’s new rulemaking.
In advance of the rule’s January 1, 2020 effective date, employers should review the compensation of all exempt employees to determine whether they still qualify for exempt status, and take the necessary steps to ensure that employees whose compensation falls below the new minimum salary threshold will receive overtime pay. The new final rule is also a good opportunity for employers to confirm that employees who remain exempt are performing job duties that qualify for one or more of the FLSA’s exemptions.
Michael L. Stevens is a Partner and Labor & Employment Practice Group Leader at Arent Fox LLP. He can be reached at 1-202-857-6382 or email@example.com. Alexandra M. Romero is an Associate at Arent Fox LLP. She can be reached at 1-202-828-3469 or firstname.lastname@example.org. Arent Fox LLP has offices in New York, Los Angeles, Washington, D.C., and San Francisco. Its clients include 10 of the top 20 dealership groups, based on Automotive News rankings.