On September 24, 2019, the US Department of Labor (DOL) announced its final “overtime rule” which took effect January 1, 2020. The DOL said it considered more than 200,000 comments received since 2017 in developing the new overtime rule, which had not been changed since 2004. Under the new rule, the minimum salary threshold for exempt executive, administrative and professional employees under the Fair Labor Standards Act (FLSA) increases to account for growth in employee earnings since 2004. When the new rule takes effect on January 1, 2020, approximately 1.3 million American workers will become eligible for overtime pay.
The New Overtime Rule
According to the DOL, the final overtime rule:
- Raises the “standard salary level” from the current level of $455 per week to $684 per week, which is equivalent to $35,568 per year;
- Raises the total annual compensation level for “highly compensated employees (HCE)” from the current level of $100,000 to $107,432 per year;
- Allows employers to use non-discretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices. Further, the DOL states, “If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year (52-week period) to retain his or her exempt status, the Department permits the employer to make a “catch-up” payment within one pay period of the end of the 52-week period. This payment may be up to 10 percent of the total standard salary level for the preceding 52-week period. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid”; and
- Revises the special salary level for workers in U.S. territories and in the motion picture industry. For more information on special salary levels affecting American Samoa, Puerto Rico, the U.S. Virgin Islands, Guam and the Commonwealth of the Northern Mariana Islands, check out the DOL fact sheet here.
There is no change to the duties requirements to be considered exempt from FLSA overtime in addition to the required threshold.
How Employers Should Prepare
With nearly 1.3 million U.S. workers becoming eligible for overtime pay once the new rule takes effect, it is important for employers to take steps to prepare. Here’s what to do now:
- Identify employees who will be affected. The most important step employers should take immediately is to review data for those employees currently classified as exempt who earn below the $35,568 salary threshold. An internal audit of current pay and hours worked for all salaried employees who are below the new salary threshold will help employers make the most strategic decisions for their businesses. Many of these employees may not be currently tracking their hours, so estimating how many hours they work or using a time clock, app or software over the next couple weeks will help employers get the most accurate data.
- Determine What Makes the Most Business Sense. Based on data, employers can calculate how much overtime would cost under the new rule, determine what works best in terms of budget and whether the workers should be reclassified as nonexempt, changed to hourly and provided overtime pay effective January 1, or left as exempt, but given an increased salary to meet the new minimum salary threshold.
- Communicate with Managers and Affected Employees. Once the classification has been determined, employers should meet with the affected employees and communicate any changes under the new overtime rule. According to SHRM, for newly reclassified employees, it is important to help them understand going from salaried to hourly is not a demotion, rather the changes are simply to stay in compliance with new government rules. This may be the first time they have ever been required to track their time, so explaining what is expected of them as hourly workers and how time is tracked at your organization is a must.
- Update Job Descriptions and Payroll System. The minimum salary threshold is just part of the equation when determining exempt versus nonexempt status. Employers should review their employees’ actual job duties and verify they satisfy the exemption criteria laid out in the FLSA.
Employers should start preparing now. Review your employee classifications to see if any of those who are currently classified as exempt fall below the new minimum salary threshold. More importantly, because misclassifying employees is one of the most expensive mistakes an employer can make, conduct an audit to make sure you have correctly classified your employees as exempt or nonexempt. If you’re not sure how some of your employees should be classified, let us know. We can help.