News & Insights

Employers Get Ready for New Overtime Rules

Effective January 1, 2020, employers will have to pay any employee who does not make at least $35,568 per year overtime for any hours in excess of 40 hours worked in a particular workweek. This is because there will be new overtime rules in 2020. As a result of this change, employers must review how they currently classify exempt employees and make appropriate adjustments before the new year starts as well as prepare for the financial impact on their business.

Under the Fair Labor Standards Act (“FLSA”), nonexempt employees are entitled to overtime if they work more than 40 hours in a given week. In order for an employee to be exempt from being entitled to overtime pay, their base salary and up to 10% of their non-discretionary bonuses and incentive payments (including commissions) must total at least $35,568 per year. Prior to the new Rule, the threshold was $23,660.

The overtime rate is 1.5 times the employee’s usual hourly rate. Employers must now decide whether to pay overtime to employees who will no longer be exempt from the overtime Rule or to raise their salaries enough so that they meet the new salary threshold established by the Department of Labor and remain exempt. For example, an employee who makes $30,000/year and was previously categorized as exempt will no longer be considered exempt because he/she makes less than $35,568. Accordingly, he/she will be entitled to overtime if he/she works more than 40 hours in a week. If this employee regularly works more than 40 hours a week, the employer may want to consider whether it is more cost-effective to raise the person’s salary to exceed $35,568 so he/she will continue to remain exempt or to leave the salary alone and just pay overtime as needed.

A further wrinkle is that under the new Rule, adjustments to the exempt salary threshold are no longer going to be automatically made every three (3) years. The Department of Labor has indicated that these thresholds will be updated regularly in the future but there is no set time by which the threshold will be reevaluated. This may require employers to address changes to the threshold more frequently than in the past. Each time the overtime rule is revised, employers will have to weigh the cost of raising an employee’s compensation above the new threshold against the cost of reclassifying formerly exempt employees as non-exempt and paying them the overtime rate.

The salary threshold is only one requirement for classifying workers as exempt. The employee must also perform certain duties in order to qualify as an exempt employee. There are several “white collar exemptions” which each have slightly different duties tests:

  1. The “executive exemption” requires that the employee’s primary duty be managing a department or subdivision of the enterprise (or the entire enterprise).
  2. The “administrative exemption” states that the employee’s primary duty must be an office or non-manual work that is directly related to the management or general business operation of the enterprise. An administratively exempt employee must also be permitted to exercise discretion and independent judgment with respect to matters of significance.
  3. The “professional exemption” provides that the employee’s primary duty must be work requiring either advanced knowledge in a scientific field or learning that is customarily acquired through prolonged and specialized instruction and study.

The only changes to the Rule at this time are salary-related. However, since employers will be assessing their employees’ status as exempt or non-exempt to comply with the new threshold, now would be a good opportunity for employers to also make sure that the job duties performed by their employees actually qualify them as exempt. A review of job descriptions should be undertaken regularly in order to ensure that the same are up-to-date and accurately reflect the services being performed by the employee.

If you have employees who are currently exempt and may soon become non-exempt as a result of this new Rule, please contact one of our attorneys to discuss this matter.

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