We’re less than a month away from big changes to overtime compensation approved by the Department of Labor (DOL). The new rule takes effect on December 1.
The rule raises overtime exemption thresholds for those classed as executive, administrative, professional, or computer employees—from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The final rule also says that beginning in January 1, 2020, and every three years after that, the DOL must update the minimum according to a census-derived formula. This will most likely result in an increase every three years, and it is anticipated the first increase in January 2020 will be to $984 a week ($51,168 annually).
The December 1 increase especially may seem huge. But it’s important to note that the final rule does not necessarily mean big across-the-board salary increases for all exempt employees.
Even with less than a month remaining, it should still be possible to prepare for the rule change and reduce the potential cost to your business. Start with these three steps:
- Determine which employees fall into those four above employee classes. Generally, this will include most employees who are paid a salary.
- For each of those employees, determine whether the employee’s salary will meet the threshold ($913 per week or $47,476 annually) under the new rule.
- For each exempt employee whose salary doesn’t meet or exceed the new threshold, you have two main options:
- Option 1: Increase the employee’s salary to the new threshold in order to maintain the employee’s overtime exemption; or
- Option 2: Keep the employee’s salary where it is, but reclassify the employee as non-exempt. Note that you are now obligated to pay overtime for any hours worked in excess of 40 per week. Also, you will need to track this employee’s hours more closely than you have in the past.
In order to choose between the two options, consider the following:
- For Option 1, note that you can apply up to 10 percent of any nondiscretionary bonuses, incentives, or commissions toward the employee’s minimum salary to maintain the exemption—if those are provided on at least a quarterly basis. For example, an employee receiving a $1000 bonus at the end of Q1 need only be provided $10,869 of salary for that quarter to keep the exemption: ($913 x 13-week quarter = minimum salary of $11,869 to maintain the exemption).
- For Option 2, in order to control the costs associated with switching an employee from exempt to non-exempt, consider measures to limit overtime hours worked, such as job sharing or hiring additional workers.
- Finally, for employees exempted as computer employees, employers have the option to pay an hourly rate of $27.63 and maintaining the exemption. This rate has always been available under the computer employee exemption. Practically speaking, this applies in situations where the computer employee’s hours fluctuate quite a bit, and employers want to control the overtime costs.
Remember that some salaried employees may interpret a switch from salary to hourly pay as a demotion. Employers should emphasize that the switch has nothing to do with performance, but is simply a change made in order to comply with federal law. You may also want to point out that, in some cases, a switch from salary to hourly could result in the employee taking home higher pay, especially for those employees who already work overtime. (But of course this will depend on how you intend to manage overtime hours in a potential switch.)
Note, too, that while a September lawsuit by several states has challenged the validity of the rule change, the suit has not managed (as yet) to postpone implementation of the rule change. You should certainly start planning for a change on December 1.
If you have questions or need advice, contact your team at Axiom. And stay tuned. We’ll keep you informed of any developments regarding the new overtime exemption rule, as well as any other issues affecting your business.