The long saga of the new Department of Labor (DOL) overtime rule appears to be coming to an end. Under a final rule issued on Sept. 24, 2019 by the DOL, the annual salary threshold below which workers qualify for overtime wages is increased to $684 per week ($35,569 annually) – up from the current level of roughly $455 per week. Starting January 1, 2020, employers will be required to pay time-and-a-half rates to workers who make less than the new salary threshold for all hours worked beyond 40 in a work week.
Originating under the Obama administration and first released in May of 2016, the initial rule more than doubled the threshold amount to $47,476 annually. However, it was blocked by a federal judge because this increase was determined too large for employers to handle at once. This new rule brings the level down more while still addressing the need for a higher exempt threshold.
In addition to updating the salary threshold, the new regulations also state:
- Nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10% of the standard salary level.
- The special rule for highly compensated employees would require workers to earn a total annual compensation of at least $107,432 ($684 of which must be paid weekly or on a salary or fee basis).
- There are no changes to the duties test (described below).
- The DOL intends to propose updates to the salary threshold regularly, although it will not be automatic or annually.
Qualifications for Exempt Status
The salary test for exempt status is as follows:
- For standard employees, pay of at least $684/week ($35,359/year)
- For highly compensated employees, pay of at least $107,432/year (of which $684 must be paid weekly on a salary or fee basis)
- Employee is paid on a salary basis
There are also duties tests to determine whether a position is involved in any kind of management, authoritative, or knowledge-related functions. Note that these tests have not changed with the new DOL overtime rule.
- Executive exemption.The employee’s primary duty must be managing the enterprise or a department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers (or the employee’s suggestions and recommendations as to hiring, firing or changing the status of other employees must be given particular weight).
- Administrative exemption.The employee’s primary duty must be office or non-manual work that is directly related to the management or general business operations of the employer or the employer’s customers. The employee’s primary duty also must include the exercise of discretion and independent judgment with respect to matters of significance.
- Professional exemption.The employee’s primary duty must be work requiring advanced knowledge in a field of science or learning that is customarily acquired by prolonged, specialized, intellectual instruction and study.
I have employees who now fall under the threshold. What can I do?
There are several options for you to keep compliant with the rule.
- Raise the employee’s salary to at least $35,684/year.
- Pay the employee’s current salary plus overtime after 40 hours.
- Same as #2, but limit overtime by reorganizing workload, adjusting schedules or spreading work hours over a longer time span.
- Convert the employee to non-exempt, continuing to pay on a salary basis and paying overtime as warranted.
- Convert the employee to non-exempt at an hourly rate that takes into account his or her overtime, so the total compensation stays the same.
How do I make sure I’m in compliance?
Review your payroll and identify currently exempt employees who fall below the new salary threshold. Then review your job descriptions to make sure that they accurately describe the work these employees are performing. Make sure job titles aren’t inflated, and note that titles never determine exempt status.
Finally, apply the duties tests to see if your exempt employees are really exempt. You’ll need to determine this on a job-by-job basis. From this point you can determine the best course of action to be in compliance with the rule.
Once you’ve made the necessary adjustments (be it change in classification, adjustment of hours/salary, etc.), determine how you’ll communicate these changes to affected employees. You’ll also need to have a solid process in place for tracking all hours worked by non-exempt employees. Additionally, if you have different benefits for exempt and non-exempt employees, make sure any newly-reclassified employees are provided with the appropriate benefits package.
What happens if I don’t follow the rule?
You could come under audit or investigation from the DOL. This can be triggered by a complaint from a former or current employee, or the department itself could instigate it through strategic enforcement or random selection.
Regardless of whether your lack of compliance is intentional or simply because you weren’t informed, there are steep penalties for violating the DOL overtime rule. You and your company can be held liable for both pay shortfall and liquidated damages. Willful violations (when you know the rule but do not follow it) can result in criminal prosecution and fines up to $10,000. And that’s just if the DOL knocks on your door. Employees can file private lawsuits against employers for significantly more money.
Help is Available
Additionally, it’s a good idea to consult James Moore’s HR Consulting team given the high stakes involved. We can guide you through the nuances, from duties tests to the rule itself, to help ensure that every employee is properly classified.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.