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Attention: Overtime Rule Changes Effective 1/1/2020

The US Department of Labor (DOL) released changes to the overtime provisions of the Fair Labor Standards Act (FLSA). This rule, which goes into effect on January 1, 2020, updates the minimum salary thresholds (previously set back in 2004) necessary to exempt executive, administrative, or professional employees from the FLSA’s minimum wage and overtime pay requirements. Specifically, the rule will:

  • Raise the salary level from the current $455 per week to $684 per week (or $35,568 per year for a full-year worker);
  • Raise the total annual compensation level for highly compensated employees from the current $100,000 per year to $107,432 per year;
  • Allow employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the salary level; and
  • Revise the special salary levels for workers in US territories and in the motion picture industry.

The DOL estimates this rule will make 1.3 million American workers eligible for overtime pay under the FLSA and calls this increase to the salary thresholds “long overdue in light of wage and salary growth since 2004.” The DOL reaffirms its intent to update the earnings thresholds more regularly based on its belief that “fixed earning thresholds become substantially less effective over time.”

For those unsure of what to do next, read the example scenarios below provided by Edward Jones and/or contact your trusted HRinDemand experts.

Examples of What To Do Next

Option 1

You can reclassify some employees and compute an hourly wage by dividing their former salary by 2,080 and then pay overtime (time and a half).

Example

  • A (now non-exempt) employee currently makes $40,000 per year salary
  • $40,000 divided by 2080 equals $19.23 per hour
  • If they worked 200 hours of overtime in a year, they would get an additional $5,769 in overtime pay, for a total W-2 income fo $45,769

Option 1 Takeaway

This option is likely a budget buster. You will have to actively manage the amount of OT that newly overtime-eligible employees work. But, limiting hours may cause you to have to hire more employees.

Option 2

You may reclassify these folks and convert them to hourly but readjust their wages down, taking into account the same number of hours worked per week and the overtime that you’ll have to pay as a result with the goal of holding their W-2 wages steady.

Example

  • A (now non-exempt) employee currently makes $40,000 per year salary
  • You compute the last year they worked 2,280 total hours in the ear
  • 2,280 hours, inclusive of 200 hours of overtime, is equivalent to 2,380 hours
  • 2,080= (200* 1.5) = 2,380
  • $40,000 divided by 2,380 equals an hourly wage of $16.81

Option 2 Takeaway

This option holds the budget steady by keeping the W-2 wage the same. If they work 200 hours of overtime in the year, their total W-2 income is $40,000.

Option 3

For some, you may decide to give raises to bring currently exempt employees who are below the 20th percentile of weekly earnings for full-time salaried workers up to the salary level needed to qualify for the exemption. You may find you need to require more in terms of hours and productivity from these employees in order to make this choice cost-effective.

Example

  • A formerly exempt employee currently makes $30,000 per year salary
  • In order to maintain the exemption (assuming they meet the duties test), you would have to give them a raise to at least $35,308 (and future updates)
  • But there would be no limit on productivity or the hours necessary to get there

Option 3 Takeaway

This option increases the budget but does not limit the hours of OT needed. While this may be a good option, keep in mind that exempt employees must meet the duties test and there may be future updates that you will have to follow. This means each time the weekly threshold increases, you will have to increase the exempt employee’s salary to match.

Further Considerations

For currently exempt employees who must be reclassified to non-exempt, there are a number of considerations:

  • How to explain the changes
  • Morale issues
  • Tracking hours/timekeeping
  • Rearranging job duties
  • Controlingmonitoring overtime
  • Overtime policy changes

Melissa Marsh, SPHR, SHRM-SCP, is a human resources consultant and founder of HRinDemand, a human resources company in Reno, NV, offering expert guidance and easy-to-use tools to help small businesses with employment regulations, compliance, employee relations, and company growth.

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