Happy New Year! – Prepare to Track Time of More Employees or Increase Salaries

The US Department of Labor finally released its highly anticipated changes to the overtime provisions of the Fair Labor Standards Act (FLSA). This rule, which goes into effect on January 1, 2020, will make more employees eligible for overtime because it updates the minimum salary thresholds necessary to exempt certain employees from the FLSA’s minimum wage and overtime pay requirements, as it 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
• Revise the special salary levels for workers in US territories and in the motion picture industry

This means all employees who are paid a salary falling below the new salary threshold will be non-exempt beginning on January 1, 2020. Said another way, these employees will be eligible for overtime for all hours worked over 40 in a workweek.

Remind Me About the Exemptions Affected

The FLSA generally requires employees to be paid at least minimum wage for every hour worked, and overtime (time and a half) for all hours worked over 40 in a workweek. Certain employees are “exempt” from the FLSA’s minimum wage, overtime, and record-keeping requirements. Key here are the “white collar” exemptions, namely the executive, administrative, and professional exemptions, which depend on three things:

1. The employee must be paid on a “salaried basis,” meaning the employee receives a fixed, guaranteed minimum amount for any workweek in which the employee performs any work. This means there can be no change in salary regardless of the hours worked.
2. The employee must be paid a minimum salary of, as of January 1, 2020, $684 per week ($35,658 annually).
3. However, paying a sufficient salary is not enough — the employee must also perform exempt job duties under one of the exemptions to satisfy this test. (Notably, the new rule did not make any changes to the job duties test, despite ambiguity and years of employer confusion.)

Let’s reiterate this important point again: to be exempt under one of these exemptions, all three prongs above must be satisfied.

I’m Busy — Can I Deal with This Later?

We wouldn’t recommend that. It’s time to start preparing because there are many moving parts when making classification decisions, and, as we all know, 2020 will be here sooner than we think. Also, we suspect these won’t be unilateral decisions made by the human resources department but that others will need to be involved; for most companies, that won’t happen overnight, as it may require significant analysis of the budgetary impact of potential salary increases before employee classifications can be finalized.

So what can you do now? We suggest you start by identifying employees who are currently classified as exempt but whose salaries fall below the new $684 weekly salary. Then, try to estimate the number of hours worked by the employee each workweek, which may be more difficult than it sounds, since exempt workers typically don’t track their time. Depending on the employee’s salary and the number of hours worked, you’ll want to consider whether you’re going to raise the employee’s pay to meet the new threshold or reclassify the employee as non-exempt and pay overtime; and, if you’re going to reclassify the employee, you’ll have to determine how and what the employee will be paid. You should go through the same analysis for those employees who are classified as exempt under the highly compensated employee exemption if their annual salary falls below the new $107,432 threshold.

Think you’re done? Wait, there’s more! Once you identify employees who will be reclassified, you’re going to need to craft your message to explain the changes and new expectations. You may need to develop new policies and/or train the newly non-exempt employees (and possibly their supervisors) on the company’s timekeeping policies as well as on the consequences for failing to follow them. Remember that the FLSA provides strict record-keeping requirements for employers to track the working hours of non-exempt employees. And you may be faced with the need to soothe the egos of employees who feel like being paid hourly is beneath them. (We know this sounds silly, but these morale concerns are real.)

Finally, if you have concerns about the classification of any of your other employees, or if it has simply been awhile since your employee classifications were reviewed, this is a prime time to conduct a general audit of your wage and hour practices. With many employees across the country, and likely within your own organization, being reclassified and becoming eligible for overtime come January 1, you’ll be able to make changes to the classification of other employees who may not meet any exemptions while drawing less attention.