Impact of New Federal Overtime Rule Will Vary Across New England States
On September 24, 2019, the U.S. Department of Labor announced a long-awaited final rule regarding adjustments to the salary requirements under the Fair Labor Standards Act for certain salaried employees, commonly known as the “white collar” exemptions. These exemptions apply to employees who are paid a set salary and whose jobs either require an advanced degree or involve the performance of certain administrative or managerial job duties. The final rule differs somewhat from the proposed rule released in March 2019 (discussed in an earlier client alert), and the practical effect of the final rule will vary for New England employers in different states. Significantly, the new rule includes no changes to the duties tests that dictate whether employees perform the types of job duties necessary to qualify for the white collar exemptions.
Under the new rule, which takes effect on January 1, 2020, the minimum qualifying salary for employers to utilize the white collar exemptions will increase from $23,660 annually ($455 per week) to $35,568 annually ($684 per week). For Maine employers, this increase, while substantial, will have no practical impact, because current Maine law is already set to increase the state’s minimum annual salary requirement in 2020 to $36,000 (up from the current level of $33,000), which is already greater than the new federally mandated amount. It is important to note that Maine law also requires an annual cost of living adjustment to be applied to the salary threshold each year starting on January 1, 2021, so Maine employers will need to ensure that the salaries of their exempt employees continue to meet or exceed these future adjustments.
For employers in Massachusetts, New Hampshire, Vermont, Connecticut, and Rhode Island, however, the impact of the new rule may be more immediately significant. This is because all of these states either expressly or effectively follow the federal salary threshold, so the new rule will require employers in these states to increase the salaries of their exempt employees in order to maintain the exemption. In a piece of good news, the new $35,568 annual salary requirement is substantially less than the $47,476 salary that would have been required by rules released by the Obama administration in 2016, which were blocked by a federal judge before taking effect. Another significant departure from the 2016 rules is that the federal salary threshold will not be subject to automatic adjustment in future years, although the DOL has indicated that it anticipates regularly updating the threshold through future rule changes.
The new rule will allow employers to satisfy up to 10% of the salary requirement using certain nondiscretionary bonuses and incentive payments, including commissions. In addition, the minimum salary threshold required for certain “highly compensated employees” will increase from $100,000 to $107,432 annually, although this is a significantly smaller increase than the $147,414 salary requirement proposed by the DOL in March. The “highly compensated employee” exemption applies only to employees who perform some, but not all, of the required job duties of a white collar exempt employee, and who are paid enough to be considered “highly compensated.”
In summary, employers in Massachusetts, New Hampshire, Vermont, Connecticut, and Rhode Island that have exempt employees currently earning an annual salary of less than $35,568 will need to either increase their employees’ pay above the new threshold or reclassify these employees as non-exempt and eligible for overtime. Fortunately for Maine employers, the new rule imposes no salary change for most exempt employees beyond the already planned state law increase to $36,000. Employers in all states, however, will need to ensure that they meet the higher threshold for any “highly compensated employees.”