Effective January 1, 2020, an estimated 1.3 million workers may be newly eligible for overtime pay under the United States Department of Labor’s (“DOL”) final rule announced on Tuesday. The final rule updates the regulations issued under the Fair Labor Standards Act (“FLSA”) concerning exemptions from the Act’s requirements, codified at 29 CFR § 541. This is a significant change for employers given that the salary threshold for overtime eligibility was last updated 15 years ago.

The salary threshold has been increased to $35,568 annually ($684/week) from the current threshold of $23,660 annually ($455/week). The increased threshold is considerably less than the $47,476 ($913/week) threshold in the DOL’s 2016 final rule that was invalidated by the U.S. District Court for the Eastern District of Texas.

The salary threshold for the highly compensated employee has also increased from annual compensation of $100,000 to $107,432, resulting in an estimated 101,800 more workers being entitled to overtime pay. The final rule allows nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary test requirement. For such payments to count toward salary, the payments must be paid on a quarterly or more frequent basis. There have also been revisions of the salary levels for workers in United States territories and the motion picture industry. For additional detail, the DOL has issued a list of Frequently Asked Questions about the final rule, available here.

Employers should keep in mind, however, that salary is only one component of the exemption classification. An employee classified as exempt must also perform the duties set forth in the applicable exemption. Lawsuits are often filed by employees who were paid more than the threshold, claiming that the duties they performed were not sufficient to justify an exemption from overtime.  

Now is the perfect time for employers to conduct a review to ensure that their employees are properly classified from a pay and duties perspective.

Employers may want to consider various options for implementing the final rule, including the following:

• Raise salaries: For workers whose salaries are close to the new threshold and who meet the duties test, employers may decide to raise salaries to meet the new threshold and maintain the employees’ exempt status
• Pay a salary plus overtime at time and a half for more than 40 hours:  Employers may continue to pay employees on a salary basis, and pay overtime for hours that exceed forty in a workweek.  
• Pay overtime above a salary for other than 40 hours: For employees who regularly work more than 40 hours, or who work irregular hours, employers may choose to pay a salary that is intended to compensate at “straight time” for hours in excess of 40 hours, such that only the one-half overtime premium is owed for overtime. Thus, for example, if a worker works a regular work week of 45 hours, the salary could compensate the employee for straight time for 45 hours.  One-half the regular rate would be due for hours 40-45. Similarly, an employee who has a “fluctuating workweek” may be paid a salary that is intended to compensate for all hours worked at straight time. However, employers should be aware that there are specific requirements for the “fluctuating workweek” under the existing regulations, and not all state laws recognize a “fluctuating workweek” calculation.
• Convert employees to hourly:  While not required by the regulations, employees who are non-exempt may be converted to hourly employees.
• Realign employee workload: Employers may wish to shift workload or eliminate some tasks for non-exempt workers to keep weekly hours under 40. Some employers may find it more cost-effective to retain temporary or seasonal help rather than have regular workers working overtime during busy times.
• Adjust employees’ base pay and pay overtime: Employers can adjust the amount of an employee’s earnings to reallocate it between regular rate of pay and overtime compensation, particularly for employees who work predictable overtime. Thus, an employee’s salary or hourly rate may be reduced so that, once overtime is added to regular pay, the amount of an employee’s total wages remains relatively constant.

Employers should not underestimate the non-financial impact on their organizations.  Employers will need to implement timekeeping requirements for employees who never before had to keep close track of their hours. Many employers do not closely track the use of leave time for salaried workers; this may need to change for re-classified employees. Employers will also need to keep a careful eye on “off-the-clock” time, especially through use of mobile devices, for employees who are now eligible for overtime.  Employers should expect to address morale issues arising from these changes, and should develop a communications plan to help employees through the transition.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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