Are You Ready for the New Overtime Rules?

Labor Department rules that went into effect January 1, 2020, make fewer workers exempt from overtime pay and set a trap for noncompliant employers.

On January 1, 2020, new Labor Department overtime exemption rules went into effect that will affect many employers and certain categories of workers. In a nutshell, it increases by nearly 50% the amount that an eligible employee can be paid and continue to be exempt from overtime.

The changes include the following:

• Salary Level Test. The standard salary level used to determine whether executive, administrative and professional (EAP) employees are exempt from overtime increase from $455 per week ($23,660 per year) to $684 per week ($35,568 per year) for full-time workers. (More below.)
• Salaries for Nonexempt Employees. Employees entitled to overtime pay may still be paid on a salary basis as long as they receive overtime pay for working over 40 hours in a workweek.
• Job Classifications. Employees with the same job classification don't all have to be classified as either eligible or exempt from overtime. The determination is made on an employee-by-employee basis.
• Highly Compensated Employees. The new rules raise the total annual compensation requirement for "highly compensated employees" from the currently enforced level of $100,000 to $107,432 per year.

Background

Under the Fair Labor Standards Act (FLSA), employers are required to pay "non-exempt" employees 1.5 times their regular pay rate ("time-and-a-half") for every hour worked that exceeds 40 hours in a week. In general, employees who are exempt from overtime are outside salespeople and "white collar" or EAP workers who satisfy three tests.

The Labor Department requires all three of the following tests to be met for employees to be covered by the EAP exemption and, thus, not entitled to overtime pay.

• Salary Basis Test. The employee must be paid a predetermined and fixed salary that isn't subject to reduction because of variations in the quality or quantity of work performed
• Salary Level Test. The amount of salary paid to an EAP employee must meet a minimum specified amount - $684 per week under the new rules.
• Duties Test. The employee's job duties must primarily involve executive, administrative or professional duties as defined by the DOL regulations.

Employer Compliance

Ignoring the new overtime exemption rules could have grave financial consequences for non-compliant employers, which could face new exposure to claims of unpaid overtime. If your company employs overtime-exempt workers who, under the new rules, become eligible for overtime pay, you have a few options:

1. For workers that only occasionally work more than 40 hours per week, simply pay the overtime in addition to the employee's current salary.
2. Limit non-exempt workers' hours to 40 per week. This may require redistributing workloads among existing employees and hiring additional workers who can be paid at "straight time" for the hours that would otherwise trigger overtime for your existing employees.
3. For employees who are paid near the salary level threshold and meet the EAP duties test, increase their salaries to maintain their exempt status.

Getting Started

Your optimal approach will depend on the particular facts and circumstances, and on balancing your company's needs with fair treatment of your employees. At the very least, you would be wise to review how you manage payroll and, if you're not already doing so, keep time records for your currently exempt workers.

As employment law is outside the scope of our legal services, we recommend that you consult with your employment attorney, CPA and/or payroll company on how to achieve compliance that best meets the needs of all parties.