It May Be Time to Reclassify Some Employees as Non-Exempt or Implement Pay Raises

Under a final rule issued by the U.S. Department of Labor (DOL) on September 24, 2019, employees who make less than $35,568 are eligible for overtime pay effective Jan. 1, 2020.

To be exempt from overtime under the federal Fair Labor Standards Act (FLSA), employees must be paid a salary of at least the threshold amount and meet certain duties tests. If they are paid less or do not meet the tests, they must be paid 1 1/2 times their regular hourly rate for hours worked in excess of 40 in a workweek.

The salary threshold will move to $684 a week ($35,568 annualized) from $455 a week ($23,660 annualized). According to the new rule, non-discretionary 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).

For the FLSA’s executive, administrative and professional exemptions — the so-called white-collar exemptions — employees must perform certain duties and earn at least the salary threshold. But under a special rule, highly compensated employees are eligible for exempt status if they meet a reduced duties test as follows:

  • The employee’s primary duty must be office or nonmanual work.
  • The employee must “customarily and regularly” perform at least one of the bona fide exempt duties of an executive, administrative or professional employee.

Note: Employers should note that the rule doesn’t make any changes to the duties tests, nor does it include automatic adjustments to the exempt salary threshold.

How Employers Should Prepare for Change

  1. Employers should prepare to communicate the changes to their workforce. Often misconceptions abound and workers become confused when they hear certain positions had pay increases in response to the threshold adjustment.
  2. Review Administrative, Executive, and Professional Exemption position descriptions, salaries and budgets and weigh the cost of raising employee salaries above the new threshold against the cost of reclassifying employees as nonexempt and paying overtime.
  3. Reclassify positions with great care – update job descriptions, timekeeping and overtime pay policies. Monitor bonus distributions.
  4. Track affected workers’ work time and pay overtime premiums for all hours worked beyond 40 in a workweek.

In general, reach out to your employment law counsel for updates on any possible challenges or adjustments to the timing of the new rate, set to take effect Jan. 1, 2020. Take a close look at Employment Handbooks and Policies and update them accordingly in order to have a smooth transition to compliance with the new rule.

Contact Halima White at [email protected] if you have questions regarding this post.

The information contained in this article is for informational purposes only and is not legal advice.