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Overtime in 2020

The U.S. Department of Labor (DOL) made an important announcement on September 24, 2019 that will affect whether employers will be required to pay overtime to certain employees. According to this final ruling promulgated by the DOL, employees who make less than $35,568 will be eligible for overtime pay beginning January 1, 2020.

The U.S. Department of Labor (DOL) made an important announcement on September 24, 2019 that will affect whether employers will be required to pay overtime to certain employees. According to this final ruling promulgated by the DOL, employees who make less than $35,568 will be eligible for overtime pay beginning January 1, 2020.

As it currently stands, the federal Fair Labor Standards Act (FLSA) requires employers to pay employees overtime pay (1 ½ times their regular rate of pay for time worked in excess of 40 hours in a workweek) unless employees meet a two-prong test known as the (1) salary and (2) duties test. If an employee meets the criteria of these two tests, he/she would be considered “exempt” from the FLSA requirements and, thus, the employer relieved of the requirement to pay overtime. In other words, to be exempt from overtime under the FLSA, employees would have to meet the duties test and also be paid a salary threshold amount. Simply stated, if an employee is paid less than the salary threshold amount or does not meet the duties test, then overtime must be paid.

The new DOL ruling raises the salary threshold amount from $23,660 ($455 per week) to $35,568 ($684 per week). A couple years ago, the salary threshold was almost doubled under the Obama administration ($47,000), but a federal judge in Texas held that the DOL exceeded its authority by raising the rate too high and the ruling was struck down. After going back to the drawing board, the DOL settled on a “middle ground” amount that appears to be more aligned with their authority and what constitutes a more reasonable salary threshold (per the majority opinion of employers across the country).

Bottom line – after January 1, 2020, employees must make at least $35,568 annually to meet the first prong of the two-part FLSA test. Employees must also meet the duties test (in addition to being paid at least this threshold amount) to fully be classified as exempt. In order to meet the duties test, an employee must “customarily and regularly” perform duties that fall within the FLSA categories known as the “white collar” exemptions – executive, administrative, professional and certain outside sales and computer professionals.

Other changes affected by the new ruling include the following:

  • Nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10% of the salary level; and

  • The new rule raises the threshold for “highly compensated” employees as defined by the FLSA (who must then meet a reduced duties test to be eligible for exempt status) from $100,000 per year to $107,432 per year.

There will be no automatic adjustments every few years (as was initially proposed under Obama) to the salary threshold but rather the DOL “intends to update these thresholds more regularly in the future” according to the final rule. Most employers are pleased by this DOL decision.

So, what does this new ruling mean for employers right now? How can they start to prepare?

For employers, this new threshold amount means that employees who are currently exempt and earn a salary less than $684 per week will, in most instances, become nonexempt, even if they meet the duties test. Employers should start to prepare now and take a close look at employees who are teetering around the $25-35k salary range to determine whether it would make sense to bump their salary up to the new threshold amount to secure exempt status.

Whether an employer decides to reclassify an employee to nonexempt or provide a salary increase to ensure exempt status is ultimately the prerogative of the employer. However, we do recommend a careful evaluation of job descriptions and budgets to make sure any changes make sense based on the actual duties of the job and any changes in salary are financially feasible (particularly if they affect a critical mass of employees). Essentially, an employer will want to weigh the cost of raising employee salaries above the new threshold against he cost of reclassifying employees as nonexempt and paying overtime. This is an individual workforce determination and should be made with the consultation of outside counsel to ensure compliance with the new rule.

Once determined if certain employees will be reclassified, it will be important to develop a training and communication strategy to help managers and the affected employees understand their record-keeping obligations and how overtime will be tracked. Employees required to track their hours for the first time, as well as managers, will need training on these procedures (i.e. clocking in and out or using time sheets). Also, policies should be established as to when and under what circumstances overtime will be authorized (i.e. prior authorization policy should be put in place to ensure no one works overtime without express approval from management).

In addition, employees being reclassified to nonexempt may perceive this change as a demotion; therefore, employers will want to make sure their communication around this change clearly indicates that this is not a demotion but rather a reclassifying based on a new government ruling. How employers communicate this change will be critical to maintaining morale and employee satisfaction. Being proactive with communication will be key to a smooth transition.

The change will likely impact approximately 1.2 million workers and mostly in industries such as retail, restaurants, schools and non-profits. Practically speaking, this salary threshold change will not make much of a difference for many employers. Most employees who are making less than the salary threshold amount typically do not exercise the degree of independent judgment over matters of significance necessary to qualify for one of the white collar exemptions under the duties test. However, employers should not take any chances and are strongly encouraged to review pay practices and employee classification issues prior to this rule going into effect.

An experienced HR consultant or employment attorney who can assist with a review of your pay/classification issues with a keen eye toward these new changes will be your best defense. Preparing and evaluating now will help prevent issues and potential litigation matters later. Feel free to reach out to us today!


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