New Federal Overtime Rules Effective January 1, 2020

The U.S. Department of Labor (the DOL) recently finalized its new overtime rules and estimates that the new rules will make an additional 1.3 million American workers eligible for overtime wages under the Fair Labor Standards Act (FLSA).

Under current law, which took effect in 2004, employers must pay overtime to employees who both work more than 40 hours per week and earn a salary below $455 per week ($23,660 annualized). The new overtime rules raise the salary threshold for the executive, administrative, and professional exemptions—often called “white-collar” exemptions—to $684 per week ($35,568 annualized). This same threshold will apply to employees with a computer employee exemption status. The DOL’s new minimum weekly standard salary level is considerably lower than the $913 per week level ($47,476 annualized) proposed in its 2016 overtime rules, which never went into effect after being blocked by a Texas federal district court.

The Details

The new overtime rules go into effect January 1, 2020. In addition to increasing the minimum standard salary level to $684 per week, the new rules will:

• Raise the total annual compensation requirement for the highly compensated employee (HCE) exemption from $100,000 to $107,432.
• Allow employers to use non-discretionary bonuses and incentive payments (including commissions) that are paid annually or on a more frequent basis to account for up to 10% of an employee’s required weekly salary level. Also, employers will be allowed to make a final “catch-up” payment (up to 10% of the standard salary level, or $3,556.80) within one pay period after the end of each 52-week period to ensure an employee’s salary level reaches the new minimum level of $35,568.

Employers should keep in mind that the “duties test” remains intact under the new overtime rules. Under the FLSA, both an employee’s salary and an employee’s duties determine eligibility for an exemption—placing an employee on salary (or assigning a particular job title to an employee) does not automatically exempt that employee from overtime. This means that if your employee meets the minimum salary threshold but not the duties test for a white-collar, computer employee, or HCE exemption status, then that employee is still eligible for overtime. Employers who choose to pay non-exempt employees on a salary basis must still track all of the non-exempt employee’s time and then pay overtime for hours that exceed 40 in a workweek.

Notably, the new overtime rules do not include automatic adjustments to the salary thresholds (as proposed in the DOL’s ill-fated 2016 overtime rules). The DOL has instead committed to periodically updating the minimum salary thresholds through its traditional rulemaking process.

Preparing for and Complying with the New Rules

2020 is just around the corner, but employers still have time to prepare for and take steps to ensure that they will be compliant with the new overtime rules. Here are a few steps an employer can take to prepare and some traps to avoid after the new rules take effect:

Review all of your exempt positions.

For those employees with lower salaries who typically work less than 40 hours per week, converting them to non-exempt and paying overtime for the occasional overtime hours they may work is the logical option. For those employees with higher salaries who work long hours, raising their salaries above $35,568 might be worth serious consideration because that likely will cost less than what you would end up paying in overtime hours.

You may also decide that some currently exempt positions should be non-exempt regardless of whether the positions make $684 per week or more.

Start having your soon-to-be non-exempt employees record their time.

This will help give you an idea of just how many hours a week they work (which may help you decide what hourly rate to pay them) and will provide the employees an opportunity to get in the habit of accurately recording their time. After the new overtime rules are in effect, carefully monitor your newly non-exempt employees’ time. If they were routinely working more than 40 hours per week before you reclassified them, they may be tempted to work “off-the-clock” for a variety of reasons while adjusting to their new weekly work hour limitations.

And remember that it is a violation of federal and state wage and hour laws to penalize employees for working “unauthorized” overtime by withholding payment for their overtime work. You can discipline employees for any unauthorized work time (e.g., verbal or written counseling) but always pay them for the time worked.

Make sure you have a written policy that warns your employees about working off-the-clock and mandates that they accurately record their time.

Also, decide how you are going to handle after-hours work/communications and implement a written policy. Be aware of how your employees use home computers and smartphones. As soon as you reclassify them as non-exempt, your previously exempt employees will no longer be able to work and communicate with you 24/7 without being paid. They now will be on-the-clock, and you should compensate them for anything other than a de minimis amount of time spent on work-related matters, including electronic communications. These previously exempt employees may have the hardest time making the transition to recording their time and will need your help in making that transition, as well as your oversight to ensure that they are accurately recording their time.

Start talking to your employees about the transition and why it’s happening.

Even in the absence of demotions and job duty changes, some of your previously exempt employees may feel as if they have taken a step backward. Help them understand that the transition is not a reflection of their performance and that over one million employees nationwide are facing the same reality.