The new salary level test for wage and hour exempt status goes into effect January 1, 2020. The new regulation raises the salary level test to $684/week or $35,568/year. This means for a position to be classified as exempt (Executive, Professional, or Administrative) and be paid on a salary basis while meeting the duties tests of those exemptions, it must be paid at least the salary above. That is unless the employer chooses to use a non-discretionary bonus to meet, at most, 10% of the minimum salary level.

Fact Sheet 17U, put out this month, clarifies this new regulation. An employer may reduce the salary threshold by 10% if it also pays a non-discretionary bonus to that position.  The Fact Sheet states only non-discretionary bonuses may be used to satisfy this requirement. A non-discretionary bonus and incentive pay including commissions are those that are “guaranteed” to a worker if certain conditions are met. These are bonuses “based upon a predetermined formula… bonuses for quality and accuracy of work, retention bonuses, and commissions based on a fixed formula.” 29 C.F.R.778.21 (c ).

A discretionary bonus would not qualify for this allowance. A discretionary bonus is one in which the employer retains “discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid.” 778.211(b)

The size of the bonus does not in any way have to be capped. This rule just limits the amount of any bonus to 10% toward meeting the minimum salary level of $684/week or $35,568/yr.  The payments can be annually or on a more frequent basis including making a “catch-up” payment. This catch-up payment can be made up to two weeks past the end of the year.

If the employer fails to make a catch-up payment, the exempt classification is lost for that year and the employer owes overtime pay for any hours worked over 40 during that year.

The new regulations also set a new highly compensated exemption (HCE) salary level of $107,432. This is up from the current level of $100,000 but significantly less that the previous regulations that set the highly compensated salary level at over $147,000. As before, to meet the highly compensated employee exemption the position must also be doing at least one of the primary duties of the particular exemption (Executive, Professional, or Administrative). The 10% non-discretionary bonus can be used to meet the HCE salary level test, but the weekly salary level cannot be below the standard salary level component ($684/week or $35,568/yr.).

The Fact Sheet provides an example as to how this might work and unlike the non-highly compensated exemptions, it can include discretionary bonuses or commissions to meet the test. See below:

“Employee C is compensated at $111,000 annually and customarily and regularly performs at least one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee. Employee C must be paid at least $684 per week on a salary or fee basis in order to meet the HCE exemption.

Nondiscretionary bonuses and incentive payments cannot be used to reach the $684 per week amount but can be used to satisfy the total annual compensation requirement. If Employee C receives a salary of $1,500 per week and nondiscretionary bonuses and commissions over the year totaling $33,000, Employee C is an exempt highly compensated employee.”

Source: Fact Sheet 17U Nondiscretionary Bonuses and Incentive Payments (Including Commissions) and Part 541 Exempt Employees