New overtime rules go in effect on January 1, 2020 that may affect whether your employees qualify for an exemption from overtime pay. You may recall that a previous rule in 2016 to increase salary levels was blocked by a federal judge before the rule went into effect. Thankfully, for employers, this new rule is a smaller increase in salary levels than the 2016 rule.
In summary, the salary threshold for two exemptions from overtime pay -- the white collar exemption and the highly compensated employee exemption -- are increasing on January 1, and certain nondiscretionary bonuses and incentive payments can be used to satisfy a portion of the salary threshold. This means that employers will need to increase salaries, nondiscretionary bonuses, or nondiscretionary incentive payments to retain the exemptions or pay overtime to employees who do not meet the new test.
The full details on the final rule can be found in the Department of Labor press release, but here's a brief summary of the changes:
Change in White Collar Exemption
Generally speaking, under the Fair Labor Standards Act, employers are not required to pay overtime to exempt employees who work over 40 hours per workweek. To be exempt, an employee must:
- Meet the job duties test for an executive, administrative, professional, or computer employee (which is not changing under the proposed legislation);
- Be paid on a salary basis (discussed below) for the executive exemption and be paid on a salary or fee basis (discussed below) for the administrative, professional and computer[1] exemptions; and
- Be paid at least the salary threshold amount.
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- The new rule increases the minimum salary level to $684 per week or $35,568 per year, which is up from the current salary threshold of $455 per week or $23,660 annually. (This new salary threshold is less than the $970 per week or $50,440 per year threshold set in 2016 but enjoined by the court).
- The threshold must be paid at least 90% on a salary basis ($616/week) and the remaining 10% ($68/week) can be satisfied with nondiscretionary bonuses or incentive payments.
Note that certain outside sales employees are exempt based on their duties, but this is outside the scope of this article.
Highly Compensated Employee Exemption
Another change relates to the exemption for "highly-compensated" workers. To be exempt, a highly-compensated employee:
- Must earn total annual compensation of $107,432 or more (up from the current threshold of $100,000.00) with at least $684 per week paid on a salary or fee basis with the possibility of the total remainder compensation paid in nondiscretionary bonuses or incentive payments;
- Must have a primary duty which includes performing office or non-manual work; and
- Customarily and regularly perform at least one of the exempt duties of an exempt executive, administrative, or professional employee.
Salary Basis versus Fee Basis
Being paid on a salary basis generally means that the employee receives his or her full salary regardless of the days or hours worked per week.
Being paid on a fee basis generally means that the employee is paid an agreed sum for a single job regardless of the time spent for completion. For fee payments, the test to determine whether the minimum salary level is met is to determine whether the fee payment would amount to at least $684 per week if the employee worked 40 hours per week. For example, an artist paid $400 for a painting that took 20 hours to complete would meet the minimum salary requirement because the rate would result in an $800 payment if the artist worked 40 hours.
Non-Discretionary Bonuses or Incentive Payments
Non-discretionary bonuses (group or individual) and non-discretionary incentive payments, including commission, can satisfy up to 10% of the salary level if paid on an annual or more frequent basis. These non-discretionary bonuses and incentive payments are generally based on written agreements or prior understanding of the parties with the employee generally having a contract right to the promised commission or bonus.
On the other hand, discretionary bonuses or incentive payments do not count toward the salary level. Discretionary bonuses are made the at the employer’s sole discretion without a prior contract or promise. An example is an unannounced year-end bonus.
Next Steps for Businesses
Before the end of the year, employers should:
- Audit and evaluate jobs to determine proper classification of exempt or non-exempt status based on job duties. For example, interview employees to determine their current job duties and then review job descriptions. How do they line up with the job duty requirements for the exemptions? Do job descriptions need to be updated? If the job duties qualify for an exemption, then evaluate the pay to see if the threshold is met.
- Review salaries and financial impacts - The new law will cost employers more. Employers will need to pay overtime to previously exempt employees who make less than the new threshold of $684 per week or employers can choose to raise salaries of exempt employees to meet the new threshold of not less than $684 per week.
It is also recommended that employers:
- Review handbook policies - Is there a policy on overtime that requires employees to obtain advance approval? Is there a work from home policy? What is the timekeeping policy? Non-exempt employees must keep track of all time worked (even outside of regular business hours).
- Conduct management training - For example, with potentially more employees that are not exempt and need to be paid for overtime, managers must be mindful of when an employee is working, such as during the employee's lunch or answering emails at home before or after work, which would count towards hours worked.
More Information
If you would like more information on the new overtime rule, you can visit the Department of Labor’s website which has a wealth of information, such as fact sheets, compliance assistance toolkits, and compliance guides.
Further, if you need some guidance on exemptions or changes in the law, please contact Gutwein Law to help.
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[1] Note that certain computer employees can be paid on an hourly basis and still qualify as exempt if they meet the hourly threshold.
