On September 24, 2019, the Department of Labor (DOL) announced its final rule to change the Fair Labor Standards Act’s (FLSA) salary basis test, which is integral to classifying an employee as exempt from overtime payments. In order to designate an employee as FLSA overtime exempt, an employer must ensure that the employee meets both a salary basis test, which establishes a salary threshold, and a duties test, which establishes the types of responsibilities and knowledge required to be eligible for an exemption. The salary basis requirement is currently $455 per week, or $23,660 per year. PilieroMazza previously blogged about the proposed DOL overtime exemption rule here. Effective January 1, 2020, the final rule will increase the threshold amount to $684 per week or $35,568 per year, a slight increase from the originally proposed amount. Employers, including government contractors, with salaried employees making under $35,568 annually need to determine if it makes business sense to convert employees to non-exempt status or to raise their salary. Not understanding this requirement could lead to costly DOL violations.

The final rule also allows employers to include up to 10% of the salary in nondiscretionary bonuses and incentive pay. The rule also increases the compensation requirement for highly compensated employees—who are subject to minimal duties test requirements— from $100,000 to $107,432, significantly lower than what was proposed.

The DOL estimates that 1.2 million additional workers will be entitled to minimum wage and overtime pay as a result of the increase to the standard salary level. DOL also estimates that over 100,000 workers will be entitled to overtime pay as a result of the increase to the Highly Compensated Employees compensation level.

Like all employers, government contractors will face the prospect that some employees would be newly eligible for overtime under the new rule. In that case, the contractor may choose to convert them to hourly, non-exempt workers or raise their salaries as an alternative to paying overtime.

If a contractor chooses to convert employees to non-exempt and to pay an hourly rate, there could be a price impact on contracts bid before this rule is effective. For example, if a government contractor works on a contract covered by the Service Contract Act or the Davis-Bacon Act, designating an employee as non-exempt makes that employee eligible for the prevailing wages and fringe benefits. This could significantly impact cost of performance because those employees may have to work overtime.

Employers with salaried employees under $35,568 annually need to determine if it makes business sense to convert employees to non-exempt or raise their salary. It is also a good time to revisit whether these positions still meet the requirement of the duties test, the second component of exemption testing. Although the test has not changed, many violations stem from misunderstanding this requirement.

For more information, please contact a member of PilieroMazza’s Labor & Employment Group.

Nichole Atallah, the author of this blog, is a Partner in the Firm’s Labor & Employment and Government Contracts practice groups.