Beginning Jan. 1, 2020, any individual earning less than the new salary threshold equivalent to $35,568 per year for a full-time worker will be eligible for overtime pay. On September 24, 2019, the U.S. Department of Labor (DOL) announced its final ruling on the new overtime thresholds and based on the final rules, the standard salary level will be raised from $455 to $684 per week.
Will you be affected?
The DOL hopes this rule will allow eligibility for overtime pay to be granted to 1.3 million American workers under the Fair Labor Standards Act (FLSA). However, the federal law is the minimum requirement, so states are able to have higher thresholds. California, for example, has a higher threshold, and therefore, will not be affected by this ruling.
Those most likely to be affected:
- Managers with low salaries who currently qualify for an exemption.
- Ex. retail and restaurant managers
- Non-profit or political campaign workers.
- Professional, entry-level employees.
Note: there is not an exception for part-time workers.
Fundamentals of the final rule.
For an employee to qualify as exempt from overtime pay, they must satisfy both a salary basis and a duties test. Failing to satisfy either of these tests will result in the employee qualifying for overtime pay, which means they must be compensated one and a half times the amount of their regular hourly rate when they exceed 40 hours in one workweek.
Salary Basis Test
The salary basis test is the first requirement to determine whether or not an employee is exempt from being eligible for overtime pay.
Under this test, it is required that the employee be paid a fixed salary that cannot increase or decrease in connection with quality and or quantity of their work. In salary basis pay, reductions may be either permissible or impermissible. Impermissible reductions affect the exemption status of an employee while permissible reductions do not.
Jobs that employees are exempt from overtime pay regardless of the salary basis are:
- School teachers
This means they are all exempt even when paid hourly instead of salary.
The second requirement, a duties test, determines if an employee earning more than the salary threshold, in this case, more than $35,568 annually, should be exempt from overtime based on their work duties.
As mentioned previously, merely meeting the salary threshold doesn’t mean an employee is automatically exempt from overtime. In order for an employee to be exempt, they must earn the standard salary threshold of $35,568 and perform duties at the executive, administrative, or professional level.
An employee has the potential of meeting the requirements of the salary basis test and still fail to be an exempt employee if they do not meet the duties test requirements. It also works the opposite way – an employee can pass the duties test but not meet the salary basis requirements.
Currently, the thresholds for employee earnings date back to 2004. Due to evolving pay practices, the Department will allow nondiscretionary bonuses and incentive payments, like commission, that are paid at least annually to count as up to 10% of the standard salary level, per the DOL.
An employee will now be viewed as a highly compensated employee (HCE) when they are compensated $107,432 per year, instead of the currently-enforced $100,000 annually.
Employers note: although the rule updates the exempt salary requirement, this rule won’t make any changes to the duties tests described above. It’s also important to be prepared for future adjustments as the DOL intends to update these more frequently, likely every four years.
As the date for this rule to become effective approaches, it is important for you as an employer to prepare accordingly. Our partners at ThinkHR compiled a guideline for preparing for new overtime thresholds. Here are some suggestions on what you can do before Jan. 1, 2020.
- Determine which employees will earn up to or less than $35,568 a year.
- Revise and assess job descriptions, ensure accuracy, and update as needed based on the duties test.
- Anticipate overtime for affected employees and determine how much overtime they work on average per week.
- Revise and critique your current overtime policies.
- Make sure productivity is measurable and that hours are tracked properly.
- Reassess your break rules.
- Communicate these changes to employees who will be affected.
After determining which employees may be affected, employers may want to take a look at their current salaries or exempt statuses to prepare for the new rule. One of the two following options may be appropriate:
- Reclassifying the position as either exempt or nonexempt on or prior to Jan.1, 2020 and start paying overtime if the salary falls below the threshold.
- Enforce an increase in salary sufficient enough to maintain an exemption based on the new salary requirements. Keep in mind that you may offer bonuses, incentives, and commissions that can satisfy up to 10% of the newly proposed standard salary level.
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Disclaimer: Please note that this Q&A is not all-inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding the specific application of the information to your own plan.