With the U.S. Department of Labor’s new overtime rule becoming effective in less than two months, on January 1, 2020, employers are well advised to be working now to implement any needed changes by the new year.
This fall, the DOL issued its final rule affecting pay requirements for exempt executive, administrative and professional employees (the so-called “white collar” exemptions) under the Fair Labor Standards Act (FLSA). The rule:
- Raises “standard salary level” required for the white collar exemptions to $684 per week (annualized to $35,568), up from the $455 per week level that has been in place since 2004;
- Raises the annual compensation requirement for “highly compensated employees” (those who have at least one exempt duty) to $107,432 per year, up from $100,000;
- Allows nondiscretionary bonuses and incentive payments (including commissions) to be used to satisfy up to 10% of the standard salary level, including in a one-time catch-up payment, if certain conditions are met; and
- Revises certain special salary levels applicable to workers in U.S. territories and the motion picture industry.
Employers that elect to transition currently exempt employees into overtime-eligible status, and decide to change from salary to hourly pay, will need to determine a method for setting the pay rate. While the “reverse engineering” method, which uses the current salary to arrive at an hourly rate, may address business needs in some cases, employers should note that use of this method may be constrained in states with stringent Equal Pay laws. Employers interested in using the 10% allowance to meet the new pay obligations are advised to consult with counsel before proceeding, as failure to meet the conditions in the new rule results in loss of the exemption and therefore liability for overtime pay.
Employers that decide to move forward with the shift from exempt to non-exempt status should plan ahead to address likely logistical and employee relations challenges, for example:
- Ensuring accurate recording and timely reporting of hours of work for a new cohort
- Ensuring compliance with meal and rest break requirements in certain states
- Changing wage payment timing, in states where non-exempt pay must be more frequent
- Devising appropriate messaging to deal with such issues as potential concerns of employees who view the change as a demotion or reduction in status, or who have questions about past practices
As a reminder, businesses must also comply with state and local overtime pay requirements and exemption standards. Where those standards already exceed the new FLSA levels, such as in New York, California, and Alaska, the new DOL rule will have little practical impact on exempt employees’ pay. More generally, however, companies should track overtime pay obligations on the state and local level to ensure these obligations are met as to non-exempt employees. For example, California, Colorado, and several other western states have daily (not just weekly) overtime pay requirements. In addition, some states do not recognize the same exemptions from overtime as are available under the FLSA, while others apply different duties tests when determining whether an exemption applies.
While the DOL rule appears fairly simple at first glance, it can raise complicated compliance issues, which should be considered carefully before changes are implemented. At the same time, employers that have been considering changes to employee classifications may find this is a logical time to implement them. Your Bello Welsh, LLP counsel is available to advise you on these matters and to work with you to determine available options, assess legal and business risk, and implement an agreed plan.