Are You Ready for the New Federal Overtime Rule?

Exempt salary threshold will rise to $35,568 on Jan. 1

Lisa Nagele-Piazza, J.D., SHRM-SCP By Lisa Nagele-Piazza, J.D., SHRM-SCP December 17, 2019
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Are You Ready for the New Federal Overtime Rule?

The deadline for employers to comply with the new federal overtime rule is approaching rapidly. Before key workers leave for the holidays, businesses should ensure they have a plan in place to manage pay and expectations.

"Some employers may have put off making changes, thinking that a court may stop this law from proceeding," noted Hagood Tighe, an attorney with Fisher Phillips in Columbia, S.C. "Employers cannot afford to wait any longer."

To be exempt from overtime under the Fair Labor Standards Act's (FLSA's) white-collar exemptions, employees must 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 1.5 times their regular hourly rate for hours worked in excess of 40 in a workweek.

The new rule will raise the salary threshold to $684 a week ($35,568 annualized) from $455 a week ($23,660 annualized). Nondiscretionary bonuses and incentive payments, including commissions, paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level. The U.S. Department of Labor said the rule will make about 1.3 million workers newly eligible for overtime pay.

In addition to raising the salary cutoff for exempt workers, the new rule raises the threshold for highly compensated employees from $100,000 a year to $107,432, of which $684 must be paid weekly on a salary or fee basis. 

Employers should note that cities and states can set higher exempt salary thresholds, and those rates may be rising in 2020, too.

Compliance Checklist

Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C., has four tips to share with employers as the effective date draws near.

"First is a reminder about the new salary-level test or amount," he said. Exempt employees need to earn the weekly cutoff regardless of how frequently they are paid. For example, if an exempt employee is paid biweekly, the minimum salary-level amount is $1,368. If the employee is paid monthly, the minimum salary is $2,964.

Second, Robinson said, the new salary level goes into effect on a Wednesday, so employers should check the company's workweeks, pay periods and pay dates to see if a workweek spans Dec. 31, 2019, and Jan. 1, 2020.

"If a workweek includes some days at the end of December 2019 and some days in the beginning of January 2020, then ensure they are paid at the correct salary level for that workweek."

Third, for exempt employees who receive nondiscretionary compensation during the year, employers should decide before Jan. 1 whether to apply this nondiscretionary pay to meet up to 10 percent of the new salary level. Even if a company does this, Robinson said, exempt employees must receive at least $615.60 ($684 less $68.40, or 10 percent) per week or its equivalent, depending on how frequently they are paid.

Finally, Robinson recommends employers adopt a safe harbor policy to protect workers' exempt status if an unauthorized deduction is inadvertently made from an exempt employee's salary.

The FLSA provides a safe harbor for employers that do the following:

  • Create a "clearly communicated policy prohibiting improper deductions."
  • Have a complaint process.
  • Reimburse employees for any improper deductions.
  • Make a good-faith commitment to comply in the future.

Employers that follow these steps generally won't lose the exemption for their employees unless they willfully violate the policy by continuing to make improper deductions after employees complain.

[SHRM members-only toolkit: Determining Overtime Eligibility in the United States]

For many organizations, Jan. 1 is the start of a new performance year under bonus and incentive plans. While some employees will receive raises to meet the new salary threshold, others may be classified to nonexempt and paid premiums when they work overtime hours.

"Reclassifications may impact these plans," Tighe said. Employers need to have controls in place to ensure bonuses and incentives are properly accounted for when calculating the overtime compensation due.

Employers should also be aware of recent changes, effective Jan. 15, 2020, to what must be included in a nonexempt employee's "regular rate" of pay when calculating overtime premiums.

Communication Tips

Employers will need to develop a communication strategy and make sure reclassified employees know they are not being demoted, said Tammy McCutchen, an attorney with Littler in Washington, D.C. Be clear that these changes are based on new federal rules.

Tighe recommended that employers provide sample calculations based on typical hours worked to demonstrate that newly reclassified nonexempt employees should make the same amount of money, if not more. Employers can pose the change as a positive one, he said, by thanking employees for their hard work and emphasizing that the change gives employees the opportunity to be rewarded with overtime pay when they have to put in long hours.

[Visit SHRM's resource page on the FLSA Overtime Rule.]

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