On January 1, 2020, the Department of Labor’s final rule that raises the salary threshold requirement for overtime exemption under the Fair Labor Standards Act (FLSA) will take effect. If you have salaried workers, you could be impacted by the change.
Here’s an in-depth look at the federal laws, the new overtime rule being implemented in the new year, and a few steps on how to adapt.
What is the salary threshold for overtime?
Under the FLSA, employers are required to give eligible (or “non-exempt”) workers at least the minimum wage for hours worked. If they work more than 40 hours a week, they must be paid at least minimum wage and overtime pay for any extra hours.
The current overtime rule stipulates has the pay threshold at $455 per week, or $23,660 per year. This means that anyone who makes this amount of money (or less) must be paid overtime wages if they work more than 40 hours per week.
Your state government may also have further requirements when it comes to paying overtime. Be sure to check your local laws to ensure you are staying compliant on both the federal and state levels.
Who is “exempt” from overtime payments?
Federal law states that all employees are considered “non-exempt” from overtime pay unless they meet certain requirements. Generally, workers who are “exempt” from overtime pay are executive, administrative, professional, computer and outside sales employees.
The FLSA gives three tests—all of which an employee must pass—to determine whether or not a worker is eligible for overtime pay:
- Salary-level test: If an administrative, professional, executive, or professional computer employee’s weekly salary meets the minimum requirement—which is $455 per week until January 1—they are exempt from overtime pay.
- Salary-basis test: The employee must be paid a fixed salary that cannot go up or down based on the quantity—or quality—of their work.
- Duties test: The employee’s work duties must be considered executive, administrative, or professional duties in nature.
What kind of duties satisfy the third test?
Employees with executive duties manage an enterprise, a department, or a subdivision of an enterprise. They also regularly direct at least two employees’ work and either have the authority to hire or fire or are able to suggest or recommend doing so.
Employees with administrative duties primarily perform office or non-manual work directly related to business operations of the employer or the employer’s customers. To be considered exempt, their primary duties must include using discretion and independent judgement when it comes to significant matters.
If an employee has professional duties, their work requires an advanced knowledge in a certain type of field that is the result of specialized instruction or study. Or, they must be skilled in highly specialized fields such as computer analytics or engineering.
What will change in 2020?
The U.S. Department of Labor announced their long-awaited update on the overtime rule in September. The new rule means that 1.3 million workers who did not previously have overtime eligibility will now be able to receive extra pay for extra hours. However, more than just the salary threshold is changing with the new year. Let’s take a look at all of the updates.
Administrative, Professional, and Executive Exemption Minimum Salary
The minimum salary requirement for administrative, professional, and executive exemptions will increase from $455 per week to $684 per week, or $35,568 per year on January 1, 2020.
In other words, in order to be considered exempt from overtime, employees in these fields must earn at least $684 as a weekly salary while also satisfying the other exemption tests. Computer professionals may also be paid hourly if it is at least $27.63 per hour.
Nondiscretionary Bonuses and Incentives in Minimum Salary Requirement
The final rule will allow employers to include nondiscretionary bonuses, commissions, and incentive payments to satisfy up to 10% of the salary requirement, as long as they are paid annually at the minimum.
Employers can also make a final “catch-up” payment that brings the employee’s earnings to the minimum requirement within one pay period after the end of the year.
This means that while the employee must be paid at least 90% of the minimum salary throughout the year, (including nondiscretionary bonuses, incentive payments, and commissions), the employer has one pay period after the year to compensate the employee for any shortfalls that would classify them as non-exempt.
What are my compliance options under the new law?
If you have employees who were considered exempt before the final rule but no longer fall into that category with their current salary, you can either:
- Raise their salary to fall under the minimum requirement. If you choose to take this route, make sure they still pass all three tests.
- Elect to reclassify the impacted employees as non-exempt and pay them overtime when necessary.
What should I do before January 1?
First things first, evaluate your options and estimate how much each route will cost you. You can also choose different options for different employees. Does the employee typically work late? You might consider raising their salary. Does the employee typically work 40 hours a week? Reclassifying them might be the best option.
Revisiting your timekeeping policy to ensure accurate records is a good idea if you plan on reclassifying employees. Newly non-exempt employees may not be used to tracking hours worked, so make sure they know how to record their working hours properly. Looking for an updated, easy solution? Homebase can help with that.
Whatever you decide, make sure to not only implement the changes by January 1, 2020, but also communicate the changes with the impacted employees as soon as possible. There might even be state laws stipulating when you need to do so, so check into that.