The U.S. Department of Labor Sept. 24 released a new federal overtime regulation.

The rule revises the Fair Labor Standards Act (FLSA) test for determining when an employee is exempt from earning overtime pay, also known as the “white collar” overtime exemptions.

The National Restaurant Association believes the final rule reflects a thoughtful and deliberative process and strikes a fair and balanced approach for both employers and employees. The DOL estimates that 1.2 million additional workers will be entitled to overtime pay as result of the increase to the standard salary level. The final rule will be published in the Federal Register Sept. 27.

The Association has actively advocated industry perspectives to DOL throughout this process. Following is a summary of the final rule’s key provisions:

$35,568 threshold

The rule sets the salary threshold at $35,568 per year ($684 per week), which is slightly higher than the Department’s initial $35,308/per year level in an earlier proposed rule. The final number reflects a more fair and balanced approach than the Obama Administration’s rule, which sought to more than double the salary level to $47,476 per year, would have created a “shock to the system” and laid the foundation for the legal challenge against the Obama rule.

Bonus and incentive payments

The DOL rule also permits employers to use non-discretionary bonuses and incentive payments to satisfy up to 10 percent of the standard level on an annual basis. Any shortages will have to be made up in the following pay period. The Association had argued that bonuses are critical components of an employee’s total compensation package and should be counted toward meeting the salary threshold, and that employers value the ability to look at compensation in terms of total compensation and the regulation should support this flexibility. The Association argued for a higher percentage rate and a longer window for an employer to make catch-up payments, but this provision does represent an improvement over the Obama rule which required bonuses to be paid at least quarterly.

No automatic increases to salary level

DOL reaffirms its intent to update the salary threshold more regularly in the future through notice-and-comment rulemaking, given that the salary threshold becomes substantially less effective over time and that lengthy delays between updates create larger increases when long overdue updates finally occur. The Association had argued that the Department does not have the statutory authority to do automatic increases outside of the formal federal rulemaking process, which allows for an assessment of market conditions and input from the regulated community.

No changes to the duties test

The Association had argued against changes to the duties test stating that any attempt to artificially cap the amount of time that exempt managers can spend on nonexempt work would place significant administrative burdens on restaurant owners, increase labor costs, cause customer service to suffer and likely result in an increase in wage-and-hour litigation. For example, we noted that managers in our industry need to have a “hands-on” and “do whatever it takes” approach to ensure that operations run smoothly; and that managers should be able to lead, train, and inspire by example.

Rejects regional variations in salary level

The rule notes that variations are too complex. The question was posed in the Department’s 2017 Request for Information, issued prior to its proposed rule. Based on information received by our members, the Association argued that such a provision would make compliance more difficult for national employers.

Effective Jan. 1, 2020

The final rule is effective January 1, 2020. This will give employers more than 3 months to come into compliance.

The Obama overtime regulation was challenged by business groups and state attorneys generals and was invalidated in 2017 by U.S. Federal District Judge Amos Mazzant in the Eastern District of Texas. Judge Mazzant ruled that the regulation was beyond the statutory authority of the Secretary because the salary threshold was such a drastic increase it made the duties test, a key determinant for exemption, no longer relevant. The Department of Justice, on behalf of the DOL, appealed the decision to the Fifth Circuit Court of Appeals and the appeal is currently being held in abeyance pending a DOL rewrite of the regulation. We will continue to monitor its progress and observe how the DOJ proceeds with an appeal, but the obvious action would be to move for withdrawal of the appeal based on this final rulemaking, which would make moot the need for an appeal.

In addition to this brief summary, the Association will host an in-depth webinar in the weeks ahead to help facilitate industry compliance.

Visit the DOL website for background details and news on the rule.