FLSA Updates Finalized - Salary Threshold, Overtime Changes Coming in 2020On September 24th, the DOL issued a final ruling on “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees.” Finally, the salary threshold changes are coming. The summary from the ruling reads as follows:

The Department of Labor is updating and revising the regulations issued under the Fair Labor Standards Act implementing the exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees.

This new ruling goes into effect on January 1, 2020.

When the DOL first proposed changes under the Obama administration back in 2015, employers reacted with concerns about how this may affect their costs of doing business if substantial groups of employees were to become eligible for overtime wages. Many employers began to work frantically to update their compensation policies and went so far as to actually begin adjusting employee wages. Then, just before they were to originally go into effect, the DOL pulled the changes and went back to the drawing board.

What’s changing?

The new final ruling under the Fair Labor Standards Act seems to mirror the most recent proposal issued in March of this year. As outlined by the American Payroll Association in an update sent to members, the new rule:

  • Raises the salary threshold to $684 a week or $35,568 a year (up from $455 a week or $23,660 a year). This translates to a salary threshold of $1,368 for employees paid on a biweekly basis, $1,482 for employees paid on a semimonthly basis, and $2,964 for employees paid monthly. The rule sets the standard salary level at the 20th percentile of earnings of full-time salaried workers in the lowest-wage region (the South) and/or in the retail industry nationally.
  • Raises the total annual compensation requirement for highly compensated employees (HCEs) to $107,432 (up from $100,000 per year). The rule sets the total annual compensation level at the 80th percentile of full-time salaried workers nationally. As part of an exempt HCE’s annual compensation, the employee must receive at least the new standard salary amount of $684 per week on a salary or fee basis (without regard to the payment of non-discretionary bonuses and incentive payments).
  • Allows employers to use non-discretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices. Employers must pay exempt employees 90% of the standard salary level ($615.60 per week), and if at the end of the 52-week period the salary paid plus the additional payments do not equal the standard salary level for 52 weeks ($35,568), the employer would have one pay period to make up for the shortfall (up to 10% of the standard salary level, $3,556.80).
  • Revises the special salary levels for workers in U.S. territories. The rule sets the salary threshold at $455 per week in Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands. In American Samoa, the salary threshold is set at $380 per week.
  • Revises the special salary level for workers in the motion picture industry. The special weekly base rate for the motion picture industry increases to $1,043 per week (or a proportionate amount based on the number of days worked).

The new ruling does not contain two of the more contentious provisions:

  • Changes to the job duties test
  • Automatic updates to the salary threshold amounts

Rate of Pay Calculation Changes

Another rule from the DOL was also passed that will allow employers to more easily offer perks and benefits to their employees. This is one of the most significant updates to these kinds of regulations in over 50 years. This new rule defines what forms of payment employers include and exclude in the when calculating the regular rate of pay.

The following perks will now be excluded from an employee’s regular pay; meaning they cannot be used to meet the standard salary level for exemption from FLSA:

  • the cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
  • payments for unused paid leave, including paid sick leave or paid time off;
  • payments of certain penalties required under state and local scheduling laws;
  • reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit; and clarifies that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”;
  • certain sign-on bonuses and certain longevity bonuses;
  • the cost of office coffee and snacks to employees as gifts;
  • discretionary bonuses, by clarifying that the label given a bonus does not determine whether it is discretionary and providing additional examples and;
  • contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

This rule also includes additional clarification on bonuses saying that the label does not determine whether it is discretionary, and provides fact-based examples of discretionary bonuses that may be excluded from an employee’s regular rate of pay under section 7(e)(3) of the FLSA.

What do these changes mean for payroll?

In the end, the