Understanding the Insurance Impact of the “White Collar” Overtime Exemptions
On September 24, 2019, the Department of Labor (DOL) issued a final rule regarding overtime wage payment qualifications known as the “White Collar” rule. The “White Collar” rule is part of the Fair Labor Standards Act (“FLSA”) and governs which executive, administrative, and professional employees (white collar workers) are entitled to the FLSA’s minimum wage and overtime pay protections.
A quick review of the current law and final rule follows.
- The minimum salary level for the executive, administrative and professional exempt employees is $23,660 per year and the minimum salary for the highly compensated employees is $100,000 per year.
Final Rule (effective January 1, 2020):
- The minimum salary level for the executive, administrative, and professional exempt employees will be set at the 20th percentile of standard salary, which raises the minimum from $455 to $684 per week.
- This means that the minimum annual salary level increases to $35,568 per year. An employee making less than the new minimum salaried level is eligible for overtime.
- The minimum salary level for the “highly compensated employees” (HCE) increases to $107,432 per year.
- Employers are allowed to use nondiscretionary bonuses and incentive payments, including commissions, paid at least annually to satisfy up to 10 percent of the standard salary level.
- If the employee does not earn enough in bonus or incentive payments in a year to retain exempt status, the employer can make “catch up” payments within one pay period at the end of the year.
- A catch-up payment may be up to 10% of the total standard salary level for the preceding year.
- Any “catch-up” payments will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.
- Revision of the special salary levels for workers in US territories and the motion picture industry.
- American Samoa = $380/week;
- Puerto Rico, US Virgin Islands, Guam and North Mariana Islands = $455/week;
- Motion Picture industry = $1,043/week.
Important Outputs from the Final Rule
- The final rule will become effective on January 1, 2020, giving employers three months to prepare.
- The final rule calls for more routine updates to salary and compensation levels, but does not provide specific guidelines.
- The final rule does not make any changes to the duties test for executive, administrative and professional employees.
How to Prepare
Given this timeframe, it is imperative to plan now for the impact of this rule. This final rule applies to all employers, regardless of size.
- Audit your workforce and identify employees who will be impacted by this change. Remember, it is your salaried employees who are currently earning less than $35,568 that you must identify. It is this group of employees who will need to receive a raise to the threshold or be reclassified as non-exempt.
- Develop a strategy for how you are going to address the employees that are no longer exempt. Identify the most cost effective way to address those changes.
- Evaluate your employment handbook. Do the changes to the exemptions require you to change any of your existing employee policies? Do new policies need to be implemented to address the changes? How will you communicate the changes to your employees?
- Use the new law to ensure compliance at your business and minimize the exposure for potential wage and hour litigation.
Once your organization has reviewed the questions above, look to address how this may affect your insurance coverages.
- Make sure any changes that you make to wages/salary for your employees is applied to the estimated payroll used in budgeting for your workers’ compensation coverage.
- Do you currently have an employment practices liability policy? If so, does that policy include defense coverage for FLSA wage and hour disputes? If not, contact your Account Team to discuss this defense coverage and any available options to add it to your existing policy.
The final “White Collar” rule has been issued with an effective date of January 1, 2020, meaning now is a good time to review your employment practices and insurance coverages. Ensuring that you are in compliance with employment law is an important risk management strategy and can be vital as your organization seeks to attract/retain key talent. We encourage you to work with your M3 Account Team to make sure you have the right insurance coverages in place.