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Are Your Pay Rates Compliant for 2020?

Many states raised the minimum wage, and some bumped the exempt salary cutoff

A man is holding a check in front of a laptop.

Although the federal minimum wage has been $7.25 for years, 29 states and Washington, D.C., have higher rates, and many new wage hikes took effect this year.

"Where a state or locality has implemented a minimum-wage rate that is higher than the federal rate, covered employers are required to pay the applicable state or local minimum-wage rate," explained Charles McDonald, an attorney with Ogletree Deakins in Greenville, S.C.

He doesn't expect to see a change at the federal level anytime soon, especially in an election year. Growth will likely continue at the state and local levels, he said, which is frustrating for employers because it's harder to track growth and comply with various municipality rates.

Twenty-one states raised their minimum wages at the start of 2020, according to the National Conference of State Legislatures. Employers in Alaska, Florida, Minnesota, Montana, Ohio, South Dakota and Vermont saw their rates increase automatically based on cost of living, while other states hiked their rates based on legislation or ballot initiatives. Those states are Arizona, Arkansas, California, Colorado, Illinois, Maine, Maryland, Massachusetts, Michigan, Missouri, New Jersey, New Mexico, New York and Washington.

In Arizona, California, Maryland, Minnesota, New Mexico and Washington, businesses must consider more than just the state-level changes, as many cities and counties have also raised their minimum wages. New York's and Oregon's rates are based on region. 

Employers should carefully check the state and local laws and note that some changes may take effect midyear. For instance, Washington, D.C.'s minimum wage will jump from $14 to $15 on July 1, and Connecticut's minimum wage will rise from $11 to $12 on Sept. 1. Nevada's rate will surpass the federal level, increasing to $8 an hour on July 1. 

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Employers will likely need to update their employment posters, too, in response to changes in wage and hour requirements.

Exempt Salary Thresholds Rise

In addition to adjusting for minimum-wage hikes, employers may need to bump salaries for certain exempt employees or reclassify them to nonexempt and pay overtime premiums.

"On the federal level, employers need to be aware of various changes to the Fair Labor Standards Act [FLSA]," said Franklin Wolf, an attorney with Fisher Phillips in Chicago. Effective Jan. 1, employees in jobs under the FLSA's white-collar exemptions—executive, administrative and professional roles—must make at least $684 a week ($35,568 annualized) to be exempt from overtime pay. The FLSA requires that employees be paid a salary of at least the threshold amount and meet certain duties tests. If they are paid less or do not meet the tests, they must be paid 1 1/2 times their regular hourly rate for hours worked in excess of 40 in a workweek.

[SHRM members-only toolkit: Complying with U.S. Wage and Hour Laws and Wage Payment Laws] 

Employers should note that several states have higher salary cutoffs for exempt workers. In California, for example, the weekly salary threshold for the executive, administrative and professional exemptions is calculated by doubling the state minimum wage and multiplying by 40 hours. When the minimum wage goes up statewide, so does the exempt salary threshold. California's cutoff is currently $54,080 (annualized) for businesses with at least 26 employees and $49,920 for those with fewer.

Alaska's salary threshold is also double the minimum hourly wage, which was raised from $9.89 to $10.19 on Jan. 1. So the state's new exempt salary cutoff is $815.20 a week ($42,390.40 annualized).

In New York, the state's minimum salary threshold for executive and administrative employees has been increased in phases, and the actual rate depends on location. For example, the threshold is currently $58,500 (annualized) for employees who work in New York City. The cutoff in Nassau, Suffolk and Westchester counties is $50,700, and the threshold in other areas of the state is $46,020.

States may also have different thresholds for computer professionals and other job categories.

Alaska, California and New York historically tend to be ahead of the federal level, McDonald noted. But other states, such as Pennsylvania, have also proposed exempt salary increases beyond the federal level. The labor department in Washington state recently announced incremental changes to the state salary threshold, which is slated to surpass the federal level by Jan. 1, 2021, and Colorado also has a new exempt salary threshold in the works.

Rules May Change for Tipped Workers

The FLSA allows employers to pay less than the standard minimum wage to workers who customarily receive tips, as long as certain conditions are met. Businesses can take a tip credit by paying tipped workers, such as servers and bartenders, as low as $2.13 an hour if those workers earn at least the standard minimum wage of $7.25 an hour once their tips are added into their earnings. In Washington, D.C., employers may take a tip credit and pay a subminimum wage in certain situations. The rate for tipped workers there is $5 an hour for 2020. Starting in 2021, the wage will rise according to the consumer price index.

But some states set higher minimum wages for tipped workers or ban subminimum wages altogether. In California, employees must receive the standard minimum wage, plus any tips that customers leave for them.

New York allows employers to take a tip credit, but by the end of the year, tipped employees outside of the hospitality industry will need to be paid at least the applicable minimum wage, in addition to any tips received, noted Melissa Camire, an attorney with Fisher Phillips in New York City. On June 30, the difference between the minimum wage and the current subminimum wages will be reduced, and on Dec. 3, the subminimum wage will be eliminated for non-hospitality-industry tipped workers in New York.

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Complying with all the nuances of state and local wage laws can be a headache for employers. Designate someone in HR to be responsible for compliance at the state and local levels, and work with counsel to help ensure accuracy, McDonald said. "There's not really just one good resource," he added. "You have to use a combination of resources." 


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