The Department of Labor (DOL) recently released a final rule under the federal Fair Labor Standards Act (FLSA) that will extend mandatory overtime pay to 1.3 million U.S. workers. Currently, nonexempt employees who earn a salary of $23,600 per year or lower must receive overtime pay. Effective January 1, 2020, the new rule will increase the threshold to $35,568. Key points include:
- Nonexempt employees who earn less than the new salary level of $684 per week ($35,568 per year) will be entitled to overtime pay at a rate of one and one-half times the employee's regular rate of pay for all hours worked beyond 40 hours in a workweek.
- The salary level for highly compensated employees was raised to $107,432 per year.
- Only the salary basis test has changed; the duties test is unchanged.
“Employees have anticipated this adjustment for quite some time, while employers have awaited clarity on these rules, which are expected to be revised more regularly in the future,” said Jennifer Osland Hillen, vice president, professional development and business affairs at NBOA. “Schools may want to weigh the impact of raising affected employees’ salaries versus reclassifying them as nonexempt and paying overtime, if other classification requirements are met.” Hillen recommends that schools follow updates closely as the regulations become final and also be mindful of state laws, which may dictate a higher salary threshold than the federal threshold.
Attorneys at Venable LLP, including Grace H. Lee, NBOA legal counsel, provided further explanation on how the rule change might impact independent schools:
For independent schools, teachers are not required to meet the salary basis test in order to qualify for the FLSA's exemption from overtime; they need only meet the duties test. The September 24, 2019 Final Rule makes no changes in that regard, and employees who have the primary duty of teaching will still be considered exempt from overtime, regardless of their salary. However, some states set their own overtime exemption thresholds that exceed the federal requirement, even for teachers.
… In addition [to raising the salary for highly compensated employees], the Final Rule permits schools to account for any nondiscretionary bonuses and incentive payments in determining whether a given employee meets the new salary threshold. To the extent your school makes such payments, you can count those toward the employee's salary – however, they may account for only 10% of the salary threshold. …
Remember, in any wage and hour dispute, the school will be responsible for proving that the employee was properly classified as exempt. Misclassification can be a costly error. Schools are encouraged to proactively and periodically review how they have classified their employees to ensure they are in compliance with both the FLSA and any applicable state or local laws.
This is the first time the salary limit has been raised since the current limit was set by the George W. Bush administration in 2004. In 2014, the Obama administration proposed a rule change that would increase the threshold to include workers earning up to $47,000, but a federal judge invalidated the rule, which never took effect. Many employers and business groups had supported an increase in the limit but warned that the Obama threshold would require businesses to suddenly pay out hundreds of million dollars in overtime compensation or raises intended to move workers above a new threshold.
“With the lower exempt salary number, the budget impact will not be as onerous on schools as originally thought. Fortunately, much of the hard work of clarifying the exempt and nonexempt status of employees was done when the rule change was first proposed in 2014,” said Mary Kay Markunas, NBOA’s director, member resources and programs.
Unlike the Obama administrative rule, which sought to adjust the salary limit automatically every three years to keep up with rising wages, this Final Rule is a one-time change and does not include automatic updates.
