October 28, 2019

The U.S. Department of Labor's has updated and released the Federal Overtime Rule effective January 1, 2020. The Rule adjusts the salary level test, part of a three-part test for determining when white-collar employees are exempt or must be paid overtime for working more than 40 hours in a week. Anyone being compensated less than $35,500 per year will have to be paid time-and-a-half overtime regardless of job duties starting in January.

The Overtime Rule does three things of significance to charitable nonprofits: 

  1. Updates the standard minimum level for salaried workers, raising it from $455 per week ($23,660 per year) to $684 per week, or $35,568 per year. The Department has retained the existing methodology for setting the level, using the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (the South) and in the retail sector. As a result of the adjustment, the new level is 50 percent higher than the current level that was last updated in 2004. The new level is only half as much as the increase (to $955/week; $47,476/year) approved by the Obama administration in 2016, but that was blocked by a federal court.
  2. Raises the salary minimum for highly compensated employees (HCE) from $100,000 a year to $107,432 annually, of which $684 must be paid weekly on a salary or fee basis. The new minimum is set at the annualized value of the 80th percentile of weekly earnings of full-time salaried workers. This is lower than the 90th percentile methodology initially proposed earlier this year.
  3. Permits employers to treat nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis to satisfy up to 10 percent of the standard salary level. Earlier, the Obama Administration had also adopted this change.

The Labor Department announced further that it intends to propose updates to the salary and compensation levels on a regular basis, to ensure that these levels provide useful tests for exemption. It declined, however, to set a regular schedule, e.g., every three to four years.

The Final Rule is effective January 1, 2020. It does not include a phase-in period or carve-outs for nonprofits or other sectors, as some commenters had requested. The new rule does not alter the existing duties tests for executive, administrative, or professional employees.

NAO will provide updates as new information as available.