New overtime rule set to go into effect on January 1, 2020
On September 24, 2019, the U.S. Department of Labor issued a final new rule about overtime exemptions. The new rule goes into effect on January 1, 2020, and will potentially make 1.3 million American workers eligible for overtime pay under the Fair Labor Standards Act (FLSA).
Businesses should immediately start planning for implementation of the new rule that will primarily affect exempt employees; that is, those employees whom employers are not required to pay overtime. In general, exempt employees are executive, administrative, and professional (EAP) personnel.
However, the new rule also affects computer employees and highly compensated employees (HCEs).
Here are the key changes the new rule makes:
- The standard salary level is raised from the current $455 a week to $684 a week or from $23,660 a year to $35,568 a year.
- The total annual compensation threshold for HCEs is raised from $100,000 a year to $107,432 a year.
- Employers are allowed to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level.
- The special salary levels for workers in U.S. territories and the motion picture industry are changed.
Employers who currently pay exempt employees less than $684 a week do not have to start paying those employees $684 a week, but they do have to start paying them overtime. Let’s see how that can work in terms of a practical application.
Suppose the owner of a fast-food restaurant chain currently pays store managers $460 a week in salary. Currently, if a store manager works 10 hours over 40 hours during a week, he or she still gets paid only $460 a week because the store manager is currently exempt from the overtime provisions of the FLSA.
Now what happens on January 1, 2020? The store manager can still be paid $460 a week; but if the store manager works 10 hours over 40 hours, he or she will have to be paid overtime for those 10 hours. Using the current base of $460 a week and dividing by 40, the manager is currently getting paid $11.50 an hour. So that means the store manager will have to be paid $17.25 an hour for each of the manager’s overtime hours—or $460 + $172.50 = $632.50 for the week.
So if the owner of the fast-food restaurant chain doesn’t want to increase the salary of store managers to $684 a week, the owner must first require—and this is very important—store managers to start clocking in and out, just as the other hourly employees do. Then the owner may—
- Not allow store managers to work overtime. In other words, store managers must be told to walk out the door when they reach 40 hours a week. This is probably not a very practical solution for managing a fast-food restaurant.
- Ask the store managers to limit the number of hours worked overtime—to, let’s say, 5 hours. In other words, store managers must be told to walk out the door when they begin to reach 45 hours for a week. This gives the store manager a bit more flexibility with handling emergencies and other problems that may arise in the day-to-day operation of a fast-food restaurant and may be a bit more practical for managing a fast-food restaurant.
- Pay store managers overtime for any hours they work over 40 as the law requires. If the base salary is $460 a week, the store manager will have to work about 13 hours of overtime (53 hours for the week) before the weekly check reaches $684.
Identifying the “sweet spot” for determining your course of action
To identify the “sweet spot,” owners will have to run the numbers based on the current salary for the managers. For example, let’s suppose the owner is currently paying store managers $600 a week. This is above the current $455 a week, but let’s see what happens on January 1, 2020, especially if the owner doesn’t change the $600-a-week salary.
Just as before, we’ll assume store managers typically work 5 hours of overtime a week. The base salary is $15 an hour, which means the overtime rate will be $22.50 an hour.
Base rate: $600 ÷ 40 = $15 an hour.
Overtime rate: $15 × 1.5 = $22.50 an hour.
In this case, the owner will have to pay the store managers $712.50 in the weeks they work 55 hours ($600 for the first 40 hours + $112.50 for the 5 overtime hours).
To keep the store managers’ paychecks at no more than $684 a week (the new standard salary level), the owner can’t let the managers work more than 3.7 hours of overtime. If the owner knows that the managers are almost always going to have more than 3.7 hours of overtime (sometimes 5 hours a week, other times 10 hours a week), the better approach is to raise the store managers’ salaries from $600 a week to $684 a week. That way the owner keeps the managers as exempt employees and doesn’t have to worry about paying them overtime.
Warning about implementing solutions 1, 2, or 3: Employers can’t tell employees to go off the clock at 40 hours—or even at 50 hours. This violates the FLSA. So if solutions 1, 2, or 3 are adopted, a store manager paid less than $684 a week must be paid overtime for any hours over 40 worked during a week. If the owner were to tell the store managers to go off the clock when they reach 40 or even 43.7 hours, the owner will wind up paying the overtime anyway—in addition to a stiff fine.
The Obama administration’s proposed new overtime rule would have had a truly dramatic effect on business. Even though the Trump administration’s new overtime rule is more modest, it still requires careful analysis and adjustment of the rates of pay for any of your currently exempt employees paid less than $684 a week.
Suggested course of action
Before the new rule takes effect on January 1, 2020—
- Identify currently exempt employees paid below the threshold of $684 a week ($35,568 a year).
- Determine the patterns of overtime for these employees, which may involving asking those currently exempt employees to estimate how many hours over 40 they work each week.
- Make sure that these employees meet the duties tests required to be exempt. Watch out for borderline cases. While going through this process, you may realize it’s a good time to redraft job descriptions for some positions.
For each employee or class of employees, run the numbers and consider applying one of the these strategies:
- Keep your current salary level and prohibit or limit overtime.
- Keep your current salary level and pay overtime.
- Increase your current salary level to at least $684 a week so that your currently exempt employees remain exempt employees.
Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.