As another new year rolls out, changes to legislation are beginning to go into effect. One such change was announced on September 24, 2019, which is the new overtime pay rule for “white collar” workers. Under the ruling, the U.S. Department of Labor (DOL) increases the salary threshold for “white collar” employees classified as “exempt.”
Now, here is what you need to know about the new rule, and why you need to move with a sense of urgency in order to make sure your practices comply with the new rule.
The DOL’s Duty
As we begin to dive into the new overtime pay rule, we need to be aware of the role of the DOL. The U.S. Department of Labor came into existence for the purpose of improving working conditions for laborers, and to promote the welfare of those who are seeking jobs, employed, and retired.
In order to ensure that employees are paid fairly, the DOL issued the Fair Labor Standards Act (FLSA) in 1938, focusing on the minimum wage and overtime pay. So, as you can see, this rule is not necessarily a new thing. Instead, it is more of a reworking of a long-standing endeavor. Therefore, you can rest assured that the purpose of the new rule is to protect the interest of workers, and not to arbitrarily increase costs for employers.
Still, it should come as no surprise that this ruling isn’t well-received by all. In fact, attempts by the Obama administration in 2016 to amend the overtime pay rule were met with much animosity. Nevertheless, change was necessary, which brings us to where we are today.
History of the New Rule
Now, this announcement won’t necessarily come as a shock to employers. In fact, we discussed the overtime proposal back in March of 2019. So, if you weren’t buried eyeballs deep in last-minute tax filing, then hopefully you had a chance to read up while sipping your coffee or matcha.
When the proposal was in its conceptual form, the idea was to maintain the basic outline of the existing overtime rule, but to account for inflation increase from 2004 through 2017. So, that would be an average inflation increase of 2.02% for 15 years. At that time, the DOL recommended that the salary threshold be $35,308 annually, or $679 per week.
Nevertheless, this was simply a proposal at the time. Well, enough legislators obviously thought it was a good proposal, because after voting, it became a new rule.
The Deets of the New Overtime Pay Rule
So, this is where we dig into the details of the new pay rule.
First of all, to be clear, the new salary threshold is $684 per week, or $35,568 per year. As you will notice, that is a slight increase over the recommended threshold from earlier in 2019. Still, it is an approximate 50% increase over the previously established threshold from 2004.
Second of all, this ruling pertains to the workers deemed “white collar” by the Fair Labor Standards Act. “White collar” workers are executive, administrative, or professional in nature, so the rule wouldn’t necessarily apply to a factory worker, for example.
Finally, know that this ruling affects employee status. In other words, if your employee is paid at or above the threshold, he/she is considered exempt from overtime pay. However, if his/her pay is below the threshold, then you must pay overtime wages.
The Employer’s Responsibility with the Rule
At this point, it’s time for employers to look at their employees’ current salaries. Here’s the thing, this new rule is estimated to affect approximately 1.3 million employees nationwide. Therefore, there it is a good idea for all employers to take a look at their “white collar” employee wages to see if the new rule applies to them.
So, here is what employers can do to vet employees:
- Conduct a “duties test.” Employees who satisfy this test are considered to perform “white collar” job duties.
- Determine salary or fee. Here, employees must receive their wages via salary or fee, not on an hourly basis.
- Ensure that employees meet the salary threshold. This is where you look at each “exempt” employee’s wages to determine if they should be eligible for overtime pay.
Accordingly, if after considering these three items your employee’s status changes, you will face decisions. Among them, if you have employees who transition from exempt to non-exempt status, then you will need to decide if you will raise their salary, or if you will pay overtime. Furthermore, there are different changes you can make to offset the costs associated with overtime pay or increasing salaries. These include adjusting work schedules, changing fringe benefit offerings, and, in extreme situations, conducting layoffs. If you must conduct layoffs as a last resort, just make sure you comply with the legal requirements so as not to discriminate on any basis in the process.
“Making exempt employees nonexempt… can be a morale issue, especially when people will probably think they should be paid the threshold.”M. Weaver, personal interview, January 3, 2020
With regard to changing employee status from exempt to non-exempt, Mark Weaver of Opendoorculture.com identifies a possible problem. “Making exempt employees nonexempt… can be a morale issue, especially when people will probably think they should be paid the threshold,” Weaver anticipates. Therefore, be mindful of your own employees’ perspectives, and try to be intentional about doing right by them.
Important Changes to Note
So, what does the change mean for “white collar” employees who were previously considered exempt, but now don’t meet the salary threshold? Well, the changes have a few meanings.
First, it means that they are now eligible for overtime pay. So, if your “white collar” employee earns less than $684 per week or $35,568 per year, you must pay that employee overtime when the employee works extended hours. The overtime rate is calculated at 1.5 times the hourly rate, and multiplied times the number of hours over 40 hours in a 168 hour period. So, if your $30k salary employee works 43 hours in a week, you must pay three hours at 1.5 times the hourly rate.
Second, the change affects those considered to be highly compensated employees. A highly compensated employee previously had to earn a minimum of $100,000 per year to be eligible for the relaxed version of the duties test. That threshold is now set at $107,432.
Third, the new rule takes into consideration bonuses and commissions. This means that as long as you pay bonuses, incentives, or commissions annually at minimum, you are allowed to count them toward the salary threshold. However, there is a cap at 10% of the $684 weekly threshold.
More to Come
While the new overtime pay rule is a pretty big overhaul of the existing legislation, there is still more to come. In fact, every four years going forward the DOL plans to propose updates. However, the updates will not be enacted without public comment, and the changes will vary depending on the location of employees (including those in U.S. territories, for example).
Never Fear, Your Payroll Provider is Here
Obviously this is a pretty big pill to swallow. In fact, you are probably experiencing a little heartburn due to a combination of rich holiday food and trying to strategize implementing this new overtime pay rule. Still, never fear, because your payroll provider is here. At Journey, you are in good hands with people who are dedicated to staying on top of the most current changes in anything related to payroll.
So, as you think about eating that elephant, you only need to remember one thing. Namely, you eat an elephant one bite at a time. Then, approach the job with that outlook, and you will be compliant with the new overtime pay rule in no time.