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New Rule: Overtime Exemption

The Department of Labor (DOL) has issued its final rule regarding the overtime exemption for salaried employees. For an employee to be considered exempt from overtime, an employee must meet the duties test (executive, administrative, professional) and must make a minimum salary. If an employee does not pass the duties test or is not paid the threshold salary requirement, the employee is entitled to overtime for all hours worked in excess of 40 hours in a work week.

The DOL’s final rule only addresses the minimum salary requirement; therefore, the duties tests have not changed. As of January 1, 2020, employers will need to pay their salaried, exempt employees no less than $684 per week/$35,568 annually.

To meet the minimum salary requirement, employers are able to apply non-discretionary bonuses and other incentive payments to satisfy up to 10 percent ($3,556) of an exempt employee’s salary. Additionally, the new DOL rule does not provide for annual increases in the base minimum salary.

Employers should note that, this month, Pennsylvania’s Department of Labor and Industry also submitted its final regulation that will provide for increases to the salary requirement under state law. Employers must comply with both state and federal regulations. Under Pennsylvania law, the base salary will increase to $45,500 over the next three years. On January 1, 2020, the state’s salary threshold will mirror the federal at $35,568; on January 1, 2021, the state’s threshold will increase to $780 per week/$40,560 annually; and on January 1, 2022, the threshold increases to $875 per week/$45,500 annually.

Employers should begin to plan for compliance under both state and federal law to meet the $35,568 requirement. Pennsylvania employers will likewise need to consider if they will continue to meet the requirements of the exemption. By way of example, if an employer is currently paying a salaried exempt employee $25,000 a year, does that employer give the employee a $10,568 raise in salary – especially in light of the salary requirements increasing by another $10,000 under state law by 2022? Employers should review their budgets and compare the costs of salary increases versus paying overtime over the next three years.

Employers should also keep in mind the implications of transitioning an employee from salaried to hourly. Generally, employees view a salaried position as being professional and held in higher esteem. Moreover, an hourly employee will need to track all hours worked and cannot use comp time (time off) in another week to avoid paying overtime.

DISCLAIMER: The foregoing does not constitute legal advice and has been prepared for informational purposes only. Please contact us directly with questions about how these and other laws and procedures relate to your specific situation.

Prepared by GKH attorney Jeffrey J. Worley. Attorney Worley practices in the areas of Employment Law, Corporate and Commercial Law, and General Litigation.