Department of Labor Overtime Exemption Rule
(3-5 minute read)
Employees earning less than $35,568 are eligible for overtime pay, according to a new rule issued by the U.S. Department of Labor.
The final rule, which takes effect Jan. 1, 2020:
- Raises the salary threshold for FLSA-exempt executive, administrative and professional employees from $23,600 per year to $35,568 per year.
- Increases the annual pay requirement for highly compensated employees from $100,000 per year to $107,432 per year.
- Allows nondiscretionary bonuses, commissions, and other incentive payments paid at least annually to make up no more than 10 percent of the salary threshold.
- Establishes “special salary levels” for employees in specific U.S. territories—such as Puerto Rico and American Samoa—and in the motion picture industry.
Although no changes were made to the FLSA job duties test, the DOL says it plans to frequently propose updates to the salary threshold. The updates would not be automatic. Instead, they would go through the usual “notice-and-comment rulemaking.”
The new rule is familiar territory.
In 2016, the Obama-era DOL unveiled a final rule lifting the salary threshold for exempt executive, administrative and professional employees from $23,600 per year to $47,476 per year. The annual pay threshold for highly compensated employees rose from $100,000 to $134,004 per year.
Employers could use nondiscretionary bonuses and commissions to satisfy up to 10 percent of the salary threshold. However, the salary threshold would be automatically updated every three years—differing from the 2019 rule.
The 2016 rule was invalidated in 2017 by a federal judge. Prior to the rule’s invalidation, many employers had already laid the groundwork for implementation. The good news is that those preparation strategies can largely be used as a roadmap for the 2019 rule.
Here are seven tips to keep in mind as you prepare.
- Pull salary data for exempt executive, administrative and professional employees. Identify those earning less than the new salary threshold of $35,568 per year.
- See if you can raise the salary of exempt employees earning less than $35,568 per year. As suggested in an article published by the Society for Human Resource Management, it might be less expensive and administratively easier to increase salaries for exempt employees who work well over 40 hours per week instead of paying them overtime.
- Determine whether you might need to reclassify exempt employees. For instance, if you’re unable to increase annual salaries to $35,568 and your exempt employees hardly work extra hours, you could reclassify them as nonexempt. Just remember that nonexempt means they must receive overtime pay for hours worked over 40 in a workweek.
- Consider the impact of reclassifying exempt employees as nonexempt. For example, there could be morale problems due to them having to punch a timeclock. Same goes if the reclassification will result in access to fewer benefits.
- Review job descriptions to verify that exempt-salaried executive, administrative and professional employees are properly classified. To be exempt from overtime, they must earn at least the new salary threshold of $35,568 per year and meet the FLSA job duties test specific to their position. Those earning less than $35,568 per year or those who do not perform the required job duties are nonexempt and eligible for overtime.
- Check state law, as some states have their own criteria for exempt employees.
- Develop a comprehensive communication strategy so that employees understand the reasons for the change and any impact it will have on their pay and work schedule.
The implications of the new rule are sweeping and may require additional steps beyond the scope of this article. For instance, besides thoroughly reviewing your budget, you may need to evaluate your incentive pay program plus develop a plan for managing overtime.
It’s important to know that you’re not alone during this momentous time. Contact the team at Axios HR to achieve compliance in a timely manner.