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U.S. DOL's Final Rule on Overtime Regulations Impacts 1.3 Million American Workers

The U.S. Department of Labor's Wage and Hour Division announces its Final Overtime Rule that revises salary thresholds for the executive, administrative and professional exemptions from the Fair Labor Standards Act's minimum wage and overtime requirements.
White-collar worker looking tired at his desk, representing working overtime

The U.S. Department of Labor (DOL) released its Final Rule on Overtime on Sept. 24, 2019 with an effective date of Jan. 1, 2020. The rule revises the federal overtime regulations, making 1.3 million American workers newly eligible for overtime.

The standard salary level increases to $684 per week (equivalent to $35,568 per year) from the current $455/week ($23,660 annually) originally set in 2004. Above this salary level, eligibility for overtime varies based on job duties.

Other changes include:

  • An increase to the total annual compensation requirement for "highly compensated employees" (HCE) from the currently enforced level of $100,000 to $107,432 per year.
  • Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.
  • Revising the special salary levels for workers in U.S. territories and the motion picture industry
    • The special salary level in American Samoa will be $380 per week, while the special salary level in Puerto Rico, Guam, the U.S. Virgin Islands and the Northern Mariana Islands will be $455/week.
    • The special base rate threshold for employees in the motion picture industry will be $1,043/week  

Notably there were no changes to the job duties tests but the DOL plans on updating the standard salary level on a more-regular basis. 

How might employers be impacted?

An increase in salary thresholds under the overtime regulations means certain employers will need to assess their internal employee classifications. They may find the need to either transition some of their exempt employees to non-exempt status or alternatively increase salaries.

Transitioning employees from exempt to non-exempt status could increase overtime expenses, affect employee morale and/or turnover if such changes are perceived as demotions, change benefits, and require more time for recordkeeping. Such a change could result in the need to hire part-time workers or redistribute work to eliminate the potential for overtime situations.

Finally, employers could face litigation if employees whose classification changed feel they should have been non-exempt the entire time and are now due back-pay for overtime decide to file a claim.

An example of one of the drawbacks to employee reclassification – switching an employee from exempt to non-exempt status – was introduced at one of the listening sessions. A manager whose role was reclassified lost certain perks such as a flexible schedule and working from home, and viewed the switch as a demotion.

Other employers whose businesses required non-traditional work hours, such as restaurants and hotels or IT, had concerns about tracking and managing employees’ time to stay away from overtime situations.  

The other option employers could opt for is an increase in the salaries of impacted employees, but with salaries going up there exists the possibility that budgetary constraints might force the business to downsize. Wage compression also could result, where employees who did not get a raise while others did find their salaries too close to those who work for them, creating dissatisfaction and potential morale issues.

This is an update to an article published Dec. 28, 2018 and a related article was published on Sep. 30, 2019.

Tammy Tyler

Tammy Tyler is an employment law compliance manager at Paychex, Inc., a leading provider of integrated solutions for payroll, HR, retirement, and insurance services.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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