New rule to make more workers eligible for overtime pay
The U.S. Department of Labor has issued its final rule updating overtime regulations, making 1.3 million more workers eligible for overtime pay. The new rule takes effect January 1, 2020, just three months from now, so employers will need to be ready. You may remember that DoL had issued a similar proposed rule several years ago during the Obama administration that was blocked by the courts in 2017. Rather than appeal the decision, the Trump administration decided to reissue the rule, although with a lower salary threshold and no indexing for inflation. In any event, this is the first increase in the threshold since 2004. The new rules will benefit an estimated 1.3 million workers (the Obama rules would have applied to some 4 million workers).
Who Qualifies?
As you know, federal wage and hour laws (the Fair Labor Standards Act, or FLSA) requires employers to pay non-exempt employees overtime for all hours worked in excess of 40 each workweek. “Exempt” employees, who do not qualify for overtime, include executive, professional, some administrative, sales, and certain other categories. To be considered exempt, employees must meet certain tests as to their job duties, authority, and salary. The new regulations do not change the duties or authority tests but do change the salary level at which an employee who is now considered exempt will qualify for overtime. Employees paid an hourly rate will continue to get overtime.
The New Salary Thresholds
The current salary threshold for having to pay overtime is a minimum of $455 per week ($23,660 per year). The new threshold will be increased to $684 per week ($35,568 per year). Beginning January 1, 2020, any exempt employee earning less than the new minimum will need to be given a salary increase to meet the new threshold, or they will be eligible for overtime pay. For example, many retail store managers earn less than $35,568 per year, but are considered exempt by their employers because they are “managers.” With this change, however, those store managers would be eligible for overtime if their salary falls below the minimum threshold.
Employers may use non-discretionary bonuses, incentive pay, and commissions that are paid at least annually to satisfy up to 10 percent of the new salary minimum. If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given 52-week period to retain his or her exempt status, the Department permits a “catch-up” payment at the end of the 52-week period. The employer has one pay period to make up for the shortfall.
What should employers do now?
Employers only have three months in which to prepare for compliance with the new regulations. Here are steps that employers should take now:
- Have on hand pay data for any exempt (“salaried”) employees earning less than the new threshold
- Review financial and budget information to determine the cost impact of giving salary increases to those employees versus reclassifying exempt employees as nonexempt (and then having to pay reclassified employees overtime)
- Review job duties of lower paid exempt employees to make sure they should be classified as exempt
- For employees who are reclassified as non-exempt, train them on tracking their worktime, so that you can accurately compute their time over 40 hours in a workweek for overtime purposes
- Make sure that you or your payroll provider has the appropriate systems in place for timekeeping, tracking of any overtime, etc.
- Have policies in place for approving overtime, as any newly reclassified employees (from exempt to non-exempt) should have to receive authorization to work overtime
- Communicate to any reclassified employees that they are not being demoted, but that the change in classification is based on new government regulations
Employers have known for several years that some changes to the salary threshold was coming, and it looks as though we are finally there. It is important to be ready on January 1, 2020, to avoid wage & hour claims by employees and protect your business.