2020 Overtime Update – What should my business do now?

2020 Overtime update

Employers playbook on the 2020 Overtime Update

First the good news. Employers have till January 2020 to prepare for the Overtime Update.

If you have been following the saga, there have been attempts over the years (going back 2015) to increase pay. Notably during President Obama’s tenure the proposed rule (under the Fair Labor Standards Act – FLSA) was to mandate employers pay employees overtime unless

  1. They made $913 per week or
  2. Over $47,476 per week

That would have made more than $ 4 million additional workers eligible for overtime. This move was welcomed since the $23,660 threshold didn’t accurately reflect increasing inflation & was a move to expand the protection to millions of Americans – increasing their take-home pay.

However this was blocked in 2016 by a federal  judge, Amos Mazzant in Texas, on Nov. 22 – ruling in favor of a coalition of business groups & 21 states who claimed that the Department of Labor (DOL) had exceeded their authority in issuing the new rule. 

Why did Businesses object to the rule?

Well as is evident, it would have increased the business’s overall cost, including compliance & an increased overhead cost. Not to mention the expenses & effort of dealing with more regulation, paperwork & accuracy.

But before the ruling came in, most organizations had pretty much started preparing for the change – preparing for the bump in payouts. This preparation may come in handy now.

So what’s happening now

As per the latest rule issued by the US Department of Labor under FLSA, the minimum salary threshold to qualify for overtime has been increased to $35,568, as opposed to the $23,660 that is the current amount. This new amount will come into action from January 1st, 2020 and employers need to get ready for the same. This new rule also means that the weekly salary levels go up from $455 to $684 and the total annual compensation will go up from the present $100,000 to $107,432.

This new published increase is actually a little bit more than what the DOL has originally proposed – $35,308 as a minimum. What is interesting to note is that this is the first change in salary limits since 2004, but the DOL has promised that the updating will happen a lot more regularly in the years to come. The ruling has been hailed by all, because it will offer a large amount of consistency and certainty for the employers, and more importantly, more money and prosperity for the employees.

They dont get any Overtime Pay

As you probably know there are exempt & non-exempt workers. Under the Federal Labor Standards Act (FLSA) that employers need to comply with, certain classes of employees like managers & those with advanced knowledge – like those in medicine / scientists, are exempt from being able to earn overtime pay if they make above specific salary thresholds.

Effective 1st January 2020 these thresholds are

  • More than $684 per week; or
  • Over $35,568 a year

Also remember that salary is not the only factor used to determine eligibility for overtime. In addition to requiring a fixed salary that exceeds the minimum threshold, there’s also a duties test. This test states that in order for a worker to be exempt from the overtime pay requirements, their duties must fall within one of the following categories:

  • Executive—like project managers and VPs
  • Administrative—like HR employees, marketers, and PR reps
  • Professional—these can be “learned professionals” like lawyers, dentists, and accountants, or “creative professionals” like writers, musicians, and actors
  • Computer employee—like software engineers or computer system analysts
  • Outside sales—like enterprise salespeople

The Details

Under the new rule, nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level.

In addition to raising the salary cutoff for exempt workers, the new rule raises the threshold for highly compensated employees from $100,000 a year to $107,432 (of which $684 must be paid weekly on a salary or fee basis). The increase is about $40,000 less than what the DOL initially proposed because it is based on the 80th percentile, rather than the 90th percentile, of all full-time salaried workers’ earnings nationwide.

Also, unlike the overtime rule that President Barack Obama’s administration put forward in 2016, the new rule doesn’t include automatic adjustments to the exempt salary threshold. There are predictions that there will be challenges in court, but the chances of them actually succeeding seem negligible at the moment.

As outlined by the American Payroll Association in an update sent to members, the new rule:

  • Raises the salary threshold to $684 a week or $35,568 a year (up from $455 a week or $23,660 a year). This translates to a salary threshold of $1,368 for employees paid on a biweekly basis, $1,482 for employees paid on a semi-monthly basis, and $2,964 for employees paid monthly. The rule sets the standard salary level at the 20th percentile of earnings of full-time salaried workers in the lowest-wage region (the South) and/or in the retail industry nationally.
  • Raises the total annual compensation requirement for highly compensated employees (HCEs) to $107,432 (up from $100,000 per year). The rule sets the total annual compensation level at the 80th percentile of full-time salaried workers nationally. As part of an exempt HCE’s annual compensation, the employee must receive at least the new standard salary amount of $684 per week on a salary or fee basis (without regard to the payment of non-discretionary bonuses and incentive payments).
  • Allows employers to use non-discretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices. Employers must pay exempt employees 90% of the standard salary level ($615.60 per week), and if at the end of the 52-week period the salary paid plus the additional payments do not equal the standard salary level for 52 weeks ($35,568), the employer would have one pay period to make up for the shortfall (up to 10% of the standard salary level, $3,556.80).
  • Revises the special salary levels for workers in U.S. territories. The rule sets the salary threshold at $455 per week in Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands. In American Samoa, the salary threshold is set at $380 per week.
  • Revises the special salary level for workers in the motion picture industry. The special weekly base rate for the motion picture industry increases to $1,043 per week (or a proportionate amount based on the number of days worked).

Note – California requires overtime and/or double-time pay for:

  • More than 8 hours in a day
  • More than 40 hours in a workweek
  • Hours on the 7th consecutive working day

  • You need to figure out whether any employees will come under the exempt status and whether the salary increment will have any effect on the same. 
  • The key consideration of this test is the employee’s duties, not the employee’s title. 

Of course, the roles listed here are only potential examples intended to get you thinking and do not necessarily qualify an employee for an exemption. You should refer to this fact sheet from the Department of Labor and consult with your lawyer or advisor to determine the correct approach.

  • Employers need to review their payrolls and salary records, because that will enable them to decide which employees will no longer be considered exempt. 
  • It will also be up to them to decide whether they want to increase the annual salary to meet the minimum salary threshold or whether they would want to pay compensation in terms of overtime. 
  • First, review your team’s salary levels AND duties to make sure you are complying with the current federal rules. Do you have any employees who would be newly eligible under the new overtime rule?
  • If so, talk to your employees about their preferences to find an arrangement that works for both of you. You can consider:
    • Rescheduling your employees so that they don’t incur overtime hours.
    • Cutting costs elsewhere and budgeting for more overtime hours.
    • Hiring more employees to spread the work around so that individual employees put in fewer overtime hours.
    • Increasing the salaries of certain employees to exceed the new threshold—if they often work overtime, this may be a less expensive alternative.
  • Should you choose to reclassify certain employees to make them eligible for overtime, they will need to have a proper plan of action in place. There could be possible overtime costs that will need to be handled, human resource angles, such as benefits and classification changes to name a few.
  • In addition, the new rule allows for the employers to decide whether they want to utilize commissions and bonuses to add to the new salary minimum and this is bound to raise some issues as well, which will need to be tackled early on.

Given that January 1st, 2020 is a Wednesday, yet another question that pops up is this – how will the work week be calculated. Will that week be calculated on a pro-rata basis or would the week be calculated starting with the first Monday of the next week? 

As you can see this is an evolving topic. But it’s imperative you start preparing for it right now. And we will keep track to let you know as this evolves.

Recommended reading

W 4 form strikes back – Payroll Updates

Payroll Taxes & Deductions that you should know about

Do you know your Mandatory & Voluntary Payroll Deductions

References

www.dol.gov

https://gusto.com/blog/payroll/2019-overtime-laws

https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/labor-department-issues-final-federal-overtime-rule.aspx

https://www.mhlnews.com/labor-management/dol-raises-minimum-salary-overtime#close-olyticsmodal

https://www.npr.org/2019/09/24/763723397/1-3-million-more-workers-eligible-for-overtime-pay-but-some-say-rules-fall-short

https://www.integrity-data.com/flsa-updates-finalized-salary-threshold-overtime-changes-coming-in-2020/

https://www.americanpayroll.org/news-resources/apa-news/federal-news/2019/09/26/dol-raises-weekly-white-collar-salary-threshold-to-%24684-in-2020

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