As all employers should know, certain employees are exempt from what would otherwise be a requirement to pay workers overtime for hours worked in excess of 40 per week.
To receive such an exemption, workers must perform certain duties usually categorized as executive, administrative, or professional. If the worker meets the duties test, they also must be paid on what is called a “salary basis.” That means they must be paid the same amount every week regardless of the number of hours worked, or their productivity. To be exempt from overtime, the worker must also make at least the target minimum salary set by rule.
For several decades, the required salary minimum has been $455 per week ($23,660 annualized). Starting on January 1, 2020, the new threshold will be $684 per week ($38,568 annualized).
It will come as no surprise that this announcement will create feelings of deja vu. During the Obama administration in 2016, the Department of Labor proposed changing the salary threshold to $47,000 per year. A lot of our clients started the process of determining how to recalibrate their business models to see how they were going to make this new, much higher, threshold work. However, during that planning process, a federal judge in Texas ruled that the Department of Labor did not have the authority to raise the threshold so dramatically.
If you are confused about how this all works, here is an example that should help clear things up. Consider a retail establishment. Chances are it has a manager who qualifies as exempt from overtime due to that person’s duties managing the work force, making hiring and firing decisions, and exercising discretion. All the type of duties that meet the duties test. This person makes the same salary week in and week out, but often works 50 or more hours per week. Under the current rule, as long as they made $455 per week, they were exempt from overtime. After the new rule goes into effect, they will have to be paid at least $684 per week. If not, they will be entitled to earn overtime for all hours beyond 40.
It is expected that at least 1.2 million more workers will now be eligible for overtime. Under the Obama administration proposed rule change, the increased number of eligible workers would have gone up by closer to 4 million.
The Obama rule also had an annual adjustment factor for inflation. The new rule does not.
So what should you be doing now? First, do you have any otherwise exempt employees who are making less than the new threshold of $35,568? Are you going to be better off making them hourly employees and paying them overtime, or raising their salary above the threshold. This is basically a math exercise. But, there will also be a morale factor to consider. A lot of people who are paid a salary place a great deal of pride in that status, even if the reality is that they are overworked and underpaid. You cannot ignore this aspect of the process.
There are also new rules about the use of bonuses and commissions to help an employer reach the salary threshold. Rules related to highly compensated employees are also changing slightly.