A new federal overtime rule that has been proposed by the U.S. Department of Labor may become effective early in 2020, and employers need to start preparing now to get into compliance.
The rule, if it becomes final as proposed, requires employers to pay a higher minimum salary to those employees who meet certain white-collar exemptions to the overtime rules of the Fair Labor Standards Act (“FLSA”). Right now, an employer can pay a salaried exempt employee as little as $455 per week ($23,606 annually) and still claim the exemption as long as the employee is performing exempt duties, such as executive work or professional work.
The new minimum salary threshold is proposed to increase to $679 per week ($35,308 annually). That means that if you have any employee whom you are paying on salary in an amount less than $35,308 per year, you as an employer need to spend the rest of 2019 deciding if you will provide that employee with a raise or reclassify that employee as non-exempt and move him to an hourly rate and pay him overtime when he clocks more than 40 hours in any workweek.
In addition to meeting this increased salary level to $35,308 per year, anyone you are paying on a salary must also actually perform the duties of an exempt employee (the white-collar exemptions: executive, a professional or an administrator). These duties tests are much more difficult to meet than most people think, so don’t just assume that your salaried employees are actually exempt. For example, not every “manager” is an “executive exempt employee”, who under the FLSA must have the power to hire and fire and must supervise at least 2 full-time employees, as well as being in charge of a recognizable store, division or branch of your business.
During the rest of 2019, you have time to audit your pay practices to know who you are paying on salary, review their actual job duties to assure that they actually qualify for one of the exemptions, and then assure yourself that those salaried employees are making at least $679 per week. As you are going through this process, remember that the Equal Pay Act also applies to your salary decisions and you must not violate it when trying to comply with the DOL’s new salary minimum.
And yes, the DOL does measure the salary basis in weekly increments, so the employee must make at least $679 every week. The proposed rule does give employers the ability to make up 10% of the salary basis test with bonuses and commissions. So, if you pay an executive, administrator or professional employee no less than $31,777.20 in yearly salary (divided by 52 weeks) and then the employee earns another $3,530.80 annually in bonuses and commissions (paid on at least a quarterly basis), you will not be in violation of the new rule.
If this proposal gives you a sense of déjà vu, that’s because we went through this process in 2016 when the DOL proposed an increase of the minimum salary for exempt employees of $913 per week ($47,476 annually). That rule was enjoined by a federal judge in East Texas just before it was to take effect and then died in the courts and under the new administration. No such messy reprieve is expected this time with this lower salary threshold, so businesses need to start talking now about what they want to do with their salaried employees in 2020.
Interestingly, the Trump Administration’s DOL has made it even harder for companies to claim the “highly compensated employee” exemption under the new proposed rule for 2020. That exemption currently says that any employee making a salary of at least $100,000.00 per year is exempt as long as the employee is performing non-manual work and that employee performs at least one other exempt duty customarily and regularly. The proposed rule raises that salary threshold for highly-compensated employees almost 50%, to $147,414.00 per year. That means that it actually might be cheaper with a highly compensated employee who doesn’t strictly qualify for one of the white-collar exemptions to be paid on an hourly basis plus overtime rather than increasing the employee’s salary that substantially.