Do you know how to help your clients comply with the new overtime rule?
The Department of Labor’s (DOL) new overtime rule increases the standard salary level for certain exempt employees, effective Jan. 1, 2020. Under this new rule, the minimum salary threshold for many exempt employees was increased to $684 per week ($35,568 per year). The DOL estimates that, as a result of this final rule, 1.3 million currently exempt employees will become eligible for overtime pay.
Brokers must ensure that their clients’ 2020 workplace compliance efforts include any changes required by the updated rule.
The FLSA’s Overtime Requirements
Federal overtime regulations apply to employers and employees that are covered by the Fair Labor Standards Act (FLSA). Under the FLSA, when an employee works more than 40 hours in a workweek, the employer must pay “time and a half” (one and a half times the employee’s regular wage rate) for all hours worked over 40 in that workweek.
However, the FLSA also exempts certain categories of employees from the overtime pay requirement. These employees do not have to be paid overtime if they work more than 40 hours in a workweek. In order to be considered “exempt,” the employee’s position must satisfy certain requirements.
The most common FLSA exemptions are known as the “white collar” exemptions. These exemptions apply to executive employees, administrative employees, professional employees and certain highly compensated employees. There are also separate exemptions for outside sales employees and computer employees.
To be considered exempt, these positions must generally meet three requirements:
- The salary basis test. The employee must be paid a predetermined and fixed salary that is not subject to reduction due to variations in the quality or quantity of work performed.
- The salary level test. The employee’s salary must meet a minimum specified amount to qualify for the exemption.
- The duties test. The employee’s job duties must include specific responsibilities and duties, as defined by law.
Special rules apply for some positions. For example, the salary requirements do not apply to the exemption for outside sales employees or to teachers, physicians or attorneys who are covered by the professional exemption. Also, computer employees may be paid on an hourly basis and still be exempt, if their hourly rate is at least $27.63 per hour.
Remember, states may have their own legal requirements for overtime compensation. If a state establishes a law or standard that is more protective than the provisions of the FLSA, the higher standard applies for employees in that state.
Changes for 2020
The new overtime rule contains updates to the salary level for the white collar exemptions:
- The required salary level for the executive, administrative and professional exemptions is increased from $455 per week to $684 per week as of Jan. 1, 2020.
- The required annual compensation for the highly compensated employee exemption is increased from $100,000 to $107,432. This compensation must include at least $684 per week paid on a salary or fee basis.
The DOL’s final rule did not make any changes to the salary basis or duties tests.
In recognition of evolving pay practices, the new rule also permits use of nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary level requirements. If an employee does not earn enough in nondiscretionary bonuses and incentive payments in a given 52-week period to retain his or her exempt status, a “catch-up” payment may be made at the end of the 52-week period.
The employer has one pay period to make up for the shortfall. If the employer does not make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the previous 52-week period.
What This Means for Your Clients
Brokers need to educate their clients about the importance of evaluating affected employees to ensure compliance with the FLSA for 2020. This process is important because failing to calculate and pay overtime compensation correctly can lead to significant consequences.
Specifically, employers need to decide whether to increase salaries for employees who are classified as exempt but who make less than $684 per week, so they can retain their exempt status, or to reclassify them as non-exempt.
If an employee who is classified as exempt makes less than $684 per week, that person is no longer exempt for that week under the law. This means that employees would need to be paid overtime if he or she works more than 40 hours in the week. Exempt status is technically determined on a week-by-week basis, so an employee’s status can be changed during the year if needed.
A number of factors will affect this decision, such as employees’ current salaries, the number of employees affected and the likelihood that employees will work overtime. In addition to the financial implications of paying additional salary or overtime costs, employers may need to consider timekeeping and management costs, along with employee morale.
Employers may also need to review their payroll practices, as this is particularly important if they are planning to use the 10% provision and its accompanying catch-up period. Employers need to determine whether they are currently set up to review employee wages before the end of the applicable 12-month period and whether they can provide any additional compensation within one pay period after the end of the year.
Another thing to plan for is how to let employees know of any changes. Employers may want to have personal communications with affected employees and also provide general information for the entire company to provide information about the new rule and their compliance strategy.
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