Yes, we are talking about overtime again. On September 24, 2019, the Department of Labor (DOL) announced a new final rule that updates the salary threshold that some individuals must meet in order to qualify for a minimum wage and overtime exemption under the federal Fair Labors Standards Act (FLSA). Employers must begin complying with the new overtime rule on January 1, 2020.

The new rule, like the one passed and then shut down in 2016, affects executive, administrative, professional, and high-compensated employees that are paid a salary and are classified as exempt from overtime and minimum wage requirements according to the Fair Labor Standards Act (FLSA).

As a reminder, the FLSA is a federal law that requires virtually all employers in the United States to pay overtime wages to employees who work more than 40 hours in a workweek. The FLSA contains certain exemptions to its overtime payment requirements. Among these are the “white-collar” exemptions for executive, administrative or professional employees and highly compensated employees.

In general, an employee may qualify for a white-collar exemption if he or she satisfies all three of the following:

  • The “salary basis test” – The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
  • The “salary level test” – The employee’s salary amount must be at least as much as the standard salary level or the HCE salary level set by the DOL.
  • The “duties test” – The employee must primarily perform executive, administrative, or professional duties. If an employee’s total annual salary is at least as much as the highly compensated employee salary level, the employee may meet the duties test if he or she performs at least one of the duties of an exempt executive, administrative or professional employee.

What is changing?

The salary level test is the only piece that is changing. The DOL set the currently enforced amounts in 2004. Under the new rule, the minimum salary level for the “white collar” overtime exemptions would increase from $455 to $684 per week (from $23,660 to $35,568 per year). This amount is significantly lower than the minimum weekly salary level that the DOL set in its 2016 final rule that never came to be, but still has the potential to significantly impact employers.

The DOL’s rule increases the salary level for the “highly compensated employee” exemption from $100,000 to $107,432 per year.

What do employers need to do?

Employers should review their salaried exempt employees and determine if they have any employees that they are currently classifying as exempt from overtime under the professional, executive and administrative exemption or the highly compensated employee exemption. Then employers should identify those employees in this group whose salary below the new threshold.

If you find you have employees in this category, you will need to begin making some decisions on how you want to comply with the new rule starting January 1, 2020. Here are some examples to help you weigh your options.

Example #1- Employee who works regular overtime

Mary is a Graphic Designer whose work falls under the creative professional exemption.

She is currently paid a salary of $30,000 per year.

Mary’s work routinely takes her 42 hours per week (which means she works 104 hours of overtime per year).

Option 1: Maintain exempt status and increase Mary’s salary to $35,568 per year.

Increased cost to employer: $5,568 per year

Pros: No need to track Mary’s hours, potentially improved employee morale due to pay increase

Con: Increased cost to employer

Option 2: Maintain Mary’s salary at $30,000/$14.42 per hour and adjust her status to non-exempt.

Increased cost to employer: $2,163 per year (in overtime pay)

Pro: Potentially improved employee morale due to pay increase

Cons: Increased cost to employer, adjustment in employee status, need to track Mary’s hours

Option 3: Maintain Mary’s salary at $30,000/$14.42 per hour and adjust her status to non-exempt and limit overtime

Increased cost to employer: Depends on actual overtime worked/cost of redirected work

Pro: Minimal cost increase to employer

Cons: Need to redirect some of the employee’s work somewhere else, adjustment in employee status, need to track Mary’s hours

 

Example #2- Employee who works occasional overtime

Greg is a Business Manager whose work falls under the administrative exemption.

He is currently paid a salary of $32,000 per year.

Greg’s work usually takes 40 hours per week. His overtime is rare, only totaling 26 hours per year.

 Option 1: Maintain exempt status and increase Greg’s salary to $35,568 per year.

Increased cost to employer: $3,568 per year

Pros: No need to track Greg’s hours, potentially improved employee morale due to pay increase

Con: Increased cost to employer

Option 2: Maintain Greg’s pay at $32,000/$15.38 per hour and adjust his status to non-exempt

Increased cost to employer: $599.82 per year (in overtime pay)

Pro: Small increased cost to employer

Cons: Adjustment in employee status, need to track Greg’s hours

Option 3: Maintain Greg’s pay at $32,000/$15.38 per hour, adjust his status to non-exempt and limit overtime

Increased cost to employer: Depends on actual overtime worked/cost of redirected work

Pro: Very minimal cost increase to employer

Cons: Need to redirect some of the employee’s work somewhere else, adjustment in employee status, need to track Greg’s hours

As you can see, there are multiple options and each situation is unique. As an employer, you will likely need to review each employee’s situation independently before making your decision. If you need help, contact Helpside for assistance at 1-800-748-5102 or humanresources@helpside.com.