Employees and employers both have been anxiously awaiting news of a promised overtime salary adjustment. On September 24th, the Department of Labor released a new rule that will increase the minimum salary requirement for the administrative, professional, and executive exemptions from $455 per week ($23,660 annualized) to $684 per week ($35,568 annualized). The Fair Labor Standards Act (FLSA) will require the minimum salary to be increased by up to $11,648 for all exempt employees that are currently below the new threshold. The new rate will take effect on January 1, 2020. The new rule does not include automatic annual adjustments to the new rate.
For any employees that fall under the new threshold, employers have two options:
- Switch the employee to hourly or non-exempt status and pay for the overtime worked, or
- Raise the employee’s salary above the new minimum threshold of $35,568.
Not sure what’s right for your business? Here’s some background and some suggestions!
To be exempt from overtime under the FLSA, employees must be paid a salary of at least the threshold amount and meet certain duties tests (see below). If they are paid less or do not meet the tests, they must be paid one and a half (1 & ½) times their regular hourly rate for hours worked in excess of 40 in a single workweek. The new rule will force employers either to reclassify currently exempt workers to non-exempt status or raise their pay above the new threshold.
Employers will have to weigh the cost of raising employee salaries against the cost of paying overtime. Keep in mind that under the new rule, nondiscretionary bonuses, incentive payments, and commissions paid annually or “frequently” may be used to satisfy up to 10% of the standard salary level.
Meeting the salary cutoff is just one requirement for classifying workers as exempt. Employers should also take the time to review job descriptions and workers’ actual daily job duties to ensure that they satisfy the applicable exemption’s criteria.
The white-collar exemptions each have slightly different duties tests:
- Executive exemption. The employee’s primary duty must be managerial in nature. The employee must customarily and regularly direct the work of at least 2 employees and have the authority (or influence) to hire or fire employees.
- Administrative exemption. The employee’s primary duty is office or non-manual work that is directly related to the management or general business operations of the employer or its customers. The employee’s primary duty 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. Includes the salaried computer professional.
- Outside Sales Exemption. The employee’s primary duty must be making sales or obtaining orders or contracts for services, goods, or the use of a facility. The employee must be customarily and regularly away from the employer’s place of business.
The new rule also raises the threshold for highly compensated employees from $100,000 a year to $107,432, of which $684 must be paid weekly.
For the FLSA’s executive, administrative and professional exemptions, known as the “white-collar” exemptions, employees must perform certain duties and earn at least the salary threshold (see below). But highly compensated employees are eligible for exempt status if they meet a reduced duties test:
- The employee’s primary duty must be office or non-manual work.
- The employee must “customarily and regularly” perform at least one of the exempt duties of an executive, administrative or professional employee.
Our professionals suggest this is a good time for business owners to review their budgets! Employers will need to forecast how their labor costs will increase due to the change:
- Gather data on any workers classified as exempt that are earning below the new threshold.
- Consider what positions you might restructure.
- Identify whom you might reclassify to nonexempt.
- Select whom you would be willing to give a salary increase,
- Make a timetable to implement the changes by December 31st.
If employers decide to reclassify employees to non-exempt status, they will need to track affected workers’ work time and pay overtime premiums for all hours worked beyond 40 in a single workweek. They will need to communicate clearly that reclassified employees are not being demoted, and changes are based on new government rules. Keep in mind training might be needed for time-keeping procedures.
Also, make sure you have a procedure in place to limit overtime hours worked by newly nonexempt workers; at the very least make sure all overtime is pre-approved. Last but not least, consider the impact the new requirements may have on employee benefit plans, especially if you have separate tiers for salaried/exempt and hourly/non-exempt workers.
CONTACT US: The FLSA increase to the minimum salary requirement means many clients will have to make important changes and smart choices. At Fuoco Group our tax and business advisors are committed to ensuring our clients are not at risk for penalty for non-compliance and are making the right financial choices. Most of our clients will need to review their budgets and find an effective way to manage their labor costs. Let Fuoco Group advise you on compliance, profitability and efficiency – we are committed to your success. Call toll free: 855-534-2727.
