Three years ago, employers were in panic mode as President Obama's new Overtime Rule was about to go into effect. The threshold for overtime was being raised, and millions of salaried employees were about to become overtime-elibible. The impact on many businesses would have been seismic.
At the eleventh hour, the rule change was stopped, although many experts believed the injunction would be temporary. As it turns out, they were right. On January 1, 2020, a modified version of the 2016 Overtime Rule will take effect. While the increased salary threshold will be lower than the 2016 version, the implications for employers are the same.
As you prepare for the salary threshold change, making smart adjustments will help keep your company from financial fallout. By the same token, organizations that aren't prepared will risk heavy fines and public litigation.
Let's take a look at what the 2020 salary threshold change means for your organization.
What Is the New DOL Salary Threshold?
On January 1, the salary threshold for executive, administrative, and professional overtime exemptions under the federal Fair Labor Standards Act (FLSA) will increase from $23,660 ($455 per week) to $35,568 ($684 per week). Anyone earning a salary at or below the threshold will be treated as an hourly overtime, at non-exempt status.
The total annual compensation for highly compensated exempt employees will also increase from $100,000 to $107,432. These white-collar employees are deemed exempt from overtime if they meet certain minimum criteria.
The threshold hike will force businesses and non-profit organizations to take a hard look at how they pay and classify their employees.
How to Adjust for the New Salary Threshold
Whether you're a business or a non-profit organization, you have two options to prepare for the new DOL salary threshold. You can avoid the new complexities of paying overtime by raising salaries above the new threshold, or you can convert your employees to non-exempt status. Each option has its pros and cons, and neither one is a simple decision.
Raise employees' salaries
Depending on the number of employees who fall below the new threshold, and your anticipated overtime costs, you might choose to simply raise their salaries to keep them exempt. Your employees will probably thank you for it, and it will keep your payroll simple.
However, you'll need to consider whether raising a select few employees' salaries is fair to the rest of your organization. You may have workers with less seniority or a lower position in the company who are now earning as much as other employees.
Convert employees to non-exempt status
If it doesn't make good financial sense to raise your employees salaries, you'll need to reclassify them as non-exempt, or hourly. That introduces new complexities into your payroll, and you'll need to take several steps to ensure your organization is ready for paying overtime.
First, become educated. Consult with a labor attorney to become proficient in the world of hourly employees and the myriad of things you can and can't do. There will probably be all kinds of things you've never considered before that you'll need to keep on your radar.
Next, review your time system. The Department of Labor has standards and expectations for time tracking, and spreadsheets won't cut it. Take a hard look at your current time-and-attendance system to be sure it will give you the functionality you need.
Typically, the overtime rate is 1.5 times an employee's pay for every hour of overtime. But calculating the FLSA overtime rate gets tricky under certain circumstances. For example:
- When an employee works several rates within a single pay period
- If non-discretionary bonuses are earned
- When bonuses or commissions are applied to a previous pay period with overtime
- Semi-monthly (versus weekly or biweekly) payrolls
- California overtime rules, which differ from other states
Not every time system can handle these scenarios, and it's important to know with confidence that your time-and-attendance software can manage these calculations reliably. Make sure you're equipped to handle your company's overtime needs.
What's at Stake?
What if you aren't compliant by January 1? Incorrectly paying your employees — whether by neglect or by an honest mistake — will get you more than a slap on the wrist. You could face fines from the Department of Labor, which may include triple damages and other sizable penalties. Employee lawsuits are expensive as well. Depending on the seriousness of the offense, you could even face jail time.
Handpicked related reading: 70% of Companies Are FLSA Noncompliant and Don’t Know It—Are You?
Besides the legal ramifications, your company will have a publicly damaged reputation. Employee trust and morale will probably take a hit, and your best workers could leave.
The DOL is known for aggressively going after certain types of businesses that are likely to be violating labor and wage laws. You can also expect employment litigation attorneys to seize upon the opportunities this new law will create. If your organization isn't ready for the change, you could find yourself in the crosshairs.
It's not worth it to simply assume you're ready for the increased salary threshold. Do your due diligence and make sure your organization is fully prepared.
IDI has the expertise to keep you compliant with the ever-changing FLSA and DOL regulations. Stay in the know: subscribe to the blog.