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Federal Overtime Rules Are Changing – Here’s What You Need to Know

The US Department of Labor recently changed national rules regarding overtime pay. Learn more about what’s changed and which employees are exempt from overtime pay.

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Oct 18, 20193 minutes

Introduced in 1938, the Fair Labor Standards Act (FLSA) is a federal law which regulates minimum wage, overtime, equal pay, recordkeeping, and child labor.

The FLSA generally requires employers to pay employees at least the minimum wage for all hours worked, and overtime pay at a rate of 1.5 times the employee’s regular rate of pay for hours worked over 40 in a workweek. Certain employees are exempt from the minimum wage and overtime requirements.

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The New Federal Overtime Requirements

On September 24, 2019 the US Department of Labor (DOL) issued its long-awaited final overtime rule, which the agency estimates will result in making 1.3 million more Americans eligible for overtime pay. The effective date of the rule is January 1, 2020.

The most major change passed by the DOL involves the minimum salary requirements for FLSA overtime exemptions. Under current federal law, the minimum salary threshold to qualify for the executive, administrative, and professional exemptions is $23,660 annually/$455 per week. The new rule will increase that minimum salary threshold to $35,568 annually/$684 per week.

Additional key changes include:

  • Increasing minimum annual compensation requirement for the highly compensated employee exemption from $100,000 to $107,432 (at least $684 a week paid on a salary or fee basis).

  • Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the required standard salary level for exempt executive, administrative, and professional employees.

  • Revising the special salary levels for workers in U.S. territories and the motion picture industry.

It’s important to keep in mind that state and local laws often impose different or additional requirements. Employers must comply with the applicable federal, state, or local law that provides the greatest employee rights and protections.

Exempt Employees

An exempt employee is an employee who is exempt from overtime pay and/or minimum wage.

The most common FLSA exemptions are referred to as “white collar” exemptions. What’s a white collar exemption? The term commonly refers to exemptions for executive, administrative, professional, outside sales, and computer professional employees.

In general, an employee must meet all the standards of three different tests to qualify as exempt from minimum wage and overtime pay.

Those three tests include:

1. Job duties

For each exemption category, there’s an associated job duties test set forth in the FLSA regulations. The job duties tests have many detailed components that are specific to each white collar exemption. Most exemptions, though, require that the employee regularly exercise discretion and independent judgment in performing her job duties. Some states have different duties requirements than those under the FLSA.

2. Salary basis

Next, there’s the salary basis test. In general, an exempt employee must be paid a fixed salary for certain exemptions. That means their salary won’t reduce due to the quality or quantity of work they perform. Be sure to check applicable state law as the salary basis requirements may vary.

3. Salary level

With limited exceptions, an exempt employee must be paid a salary that meets the minimum threshold under the FLSA. Several states have salary thresholds that are higher than the FLSA, so check the laws in the states where you have employees to make sure you’re getting this right.

Related Article: A Simple Guide to Exempt vs Non-Exempt Employees Under the FLSA

Calculating an Employee’s Overtime Pay

Under the FLSA, overtime must be paid at 1.5 times an employee’s regular rate of pay. However, that rate isn’t always as straightforward as it might seem.

According to the Code of Federal Regulations (CFR): “The regular hourly rate of pay of an employee is determined by dividing [an employee’s] total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by [the employee] in that workweek for which such compensation was paid.”

In other words, the regular rate is calculated as an hourly rate of pay, but is not simply the employee’s customary hourly wage or hourly equivalent if paid a salary–the regular rate includes all compensation paid to, or on behalf of, employees, except for certain exclusions expressly permitted by the FLSA.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.