DOL’s Final Overtime Rule Has Traps for the Unwary

By Stephen Sutten, J.D., Minneapolis, and Mark Heroux, J.D., Chicago

Editor: Mark Heroux, J.D.

As readers have probably heard, much controversy surrounds the issuance of the Department of Labor's final overtime rule, with sweeping effects on the retail and fast food industries as well as universities and tax-exempt organizations. One of the important areas of review, no matter which direction taxpayers intend to take in response to the new rule, will be their employee benefit plans, where, as a starting point, the various definitions of compensation may need to be accommodated or modified.

Some specific thoughts, from an employee benefit perspective: What is important is to begin with a discussion of the basis of these rules under the Fair Labor Standards Act (FLSA). The FLSA requires most employees in the United States be paid at least the minimum federal wage for all hours worked and overtime pay at time and a half for all hours worked over 40 in a workweek. Unless the worker is deemed "exempt," a white-collar employee will be subject to those rules, and white-collar employees are what this new rule is all about. In general, to qualify for the exemption, an employee must either fit into a class of employees exempted under the FLSA or meet certain tests regarding "job duties" (primarily perform executive, administrative, or professional duties) and be paid on a "salary basis" of not less than a stipulated amount per week. Exemptions for certain employees are not tied to a salary requirement: Teachers (of the traditional K-12 variety), attorneys, outside sales employees, and physicians are examples of these types of employees.

The specific impact of these new rules is to address the salary-basis test by requiring overtime pay for those employees meeting the job-duties test and earning up to $913 per week—that is $47,476 per year. The old compensation threshold was $455 per week ($23,660 a year). The rule now requires that to meet the salary-basis test for the "exemption," employees not otherwise exempted from the overtime pay requirements must be paid a minimum of $913 per week, again, which works out to $47,476 per year. It is also important to note that the rule does not affect the "duties" tests for determining white-collar exemptions and, as mentioned above, the new minimum salary level for exempt-employee status does not apply to certain types of employees who otherwise would qualify for an exemption not tied to the salary requirement. The new threshold for establishing exempt status was set based on the 40th percentile of full-time salaried workers in the lowest-income census region, which is currently the South. The threshold will be adjusted every three years, beginning Jan. 1, 2020, based on the 40th percentile for salaried workers in the lowest-income census region at that time.

A concern with all of this is that everyone seems focused now on the overtime pay component, as opposed to the broader concept of a newer, higher threshold for classifying these exempt white-collar employees in the first place. That goes beyond just the overtime component, particularly in an employee benefit environment when certain classes of employees may matter for plan participation and compliance testing. It will be important under these new rules for the employer to review the employee population to make sure its exempt employees are really exempt from minimum wage and overtime pay requirements, and also to review the employee manual provisions as well as employee benefit plan documentation to ensure everyone is accounted for correctly.

A couple of other points: Unlike the provisions of the prior rule, these new rules permit nondiscretionary bonuses, incentive payments, and commissions to count toward up to 10% of the $47,476 threshold. The result is that an employee who receives a base salary of $42,729 per year may be treated as exempt, so long as the employee also receives a minimum of $4,747 in nondiscretionary bonus, commission, or incentive compensation, paid at least quarterly. That alone may require rethinking the compensation definition for qualified retirement plans and other related benefits, keeping in mind that, to be treated as exempt, the bonus program must provide quarterly payments, not just one vesting at the end of the year, and must be paid within a "short period."

Additionally, the rules also increase the total compensation requirement for "highly compensated employees" from $100,000 to $134,004 annually, which is equal to the 90th percentile of full-time salaried workers nationally. This exemption applies to employees who "customarily and regularly" perform one of the exempt duties of an administrative, executive, or professional employee. The threshold level for these employees is based on total annual compensation, not just those amounts paid on a salary basis, and like that for determining the compensation level noted above, will also adjust every three years. Specifically, the employee must, under the new rules, earn "total annual compensation" of $134,004 or more, which includes at least $913 per week paid on a salary basis to be treated as an exempt employee. "Total compensation" may consist of commissions, nondiscretionary bonuses, or other nondiscretionary compensation earned during a 52-week period, but does not include lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits.

A "highly compensated employee" under the FLSA is deemed exempt from minimum wage and overtime pay if, in addition to the compensation requirement, the employee's primary duty includes performing office or nonmanual work customarily and the employee regularly performs at least one of the exempt duties or responsibilities of an "exempt executive, administrative or professional employee." In theory, an employee may qualify as a "highly compensated exempt executive" if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet the other requirements in the standard test for exemption as an "executive." What this means, of course, is that an otherwise nonexempt employee, who customarily and regularly performs one of the exempt duties of an administrative, executive, or professional employee, and who receives a total compensation package of $134,004 or more based on an underlying salary of $913 per week or more, will be considered exempt under this rule.

This rule requires not only close payroll tracking, but again, a review of the definition of compensation (and the exceptions from that definition) in the various employee benefit programs. This is a sneaky area as it is anticipated that in revisiting plan documentation and administration on account of the new minimum wage and overtime rules, past years' employee benefit plan compliance defects in operation and in form could resurface.


Mark Heroux is a principal with the Tax Services Group at Baker Tilly Virchow Krause LLP in Chicago.

For additional information about these items, contact Mr. Heroux at 312-729-8005 or

Unless otherwise noted, contributors are members of or associated with Baker Tilly Virchow Krause LLP.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.