On September 24, 2019, a C2 government contracting client e-mailed to ask if we had heard any update on when the Department of Labor (“DOL”) might publish its new overtime rule. For those of you who have followed this topic, you know that an update to the Fair Labor Standards Act’s (“FLSA”) overtime exempt salary threshold has been a long time in the making. Ironically, that very same day the DOL published its new overtime rule, announcing that effective January 1, 2020, the overtime exempt salary threshold (also called the “salary basis test”), which is used to determine employees’ overtime exempt status, would increase to $684 per week ($35,568 per year) for a full-time worker. The forthcoming increase to the overtime exempt salary threshold is the first such boost in over a decade and represents a 34% increase over the current $455 per week ($23,600 annually). In addition, the minimum salary threshold for exempt “highly compensated employees” will also increase from $100k annually to $107,432.
A. A Little Background
The FLSA originated as part of President Franklin D. Roosevelt’s “New Deal” legislation. The FLSA was passed in 1938 after the Great Depression, when many employers took advantage of the tight labor market to subject workers to horrible conditions and long hours. In its day, it was a landmark piece of legislation that had a significant impact on the labor movement in the United States. The FLSA set various nationwide wage and hour requirements for almost all employees, including defining the “workweek”, setting a national minimum hourly wage, setting overtime requirements, and setting child labor restrictions. Still a cornerstone of wage and hour law today, the FLSA affects millions of full and part-time workers in the private sector as well as federal, state, and local government employees. Over twenty amendments have been made to the FLSA since its inception, including the Equal Pay Act that was designed to equalize wages between men and women. Most notably today, the FLSA still regulates the federal minimum wage and overtime pay requirements for most workers (although states can dictate higher thresholds).
B. What Should Employers do to Prepare for the Changes?
As of January 1, 2020, employers who have exempt, salaried employees making less than the new minimum, must either increase those employees’ salaries to $684 per week ($35,568 annually) or change those employees’ FLSA status to non-exempt and pay them on an hourly basis. There are “pros” and “cons” to each option.
Changing employees’ FLSA status to non-exempt is always permissible (i.e., you could pay your CEO on an hourly basis). However, converting employees to non-exempt means that employers would have to pay overtime (i.e., 1.5 times their hourly rate) to those employees for all hours worked over forty (40) in a workweek. Be advised that there are certain jurisdictions, such as California, Alaska, Colorado, and Nevada that may require employers to pay employees overtime based on their daily, instead of weekly hours. And some jurisdictions have already or are now considering raising the overtime exempt salary threshold to a higher level than even the new DOL rule will require.
On the other hand, automatically raising exempt employees’ salaries to meet the new minimum requirement might result in a significant rise in an employer’s overall labor expense (depending on the number of affected employees). Whereas, simply converting those employees to non-exempt, hourly would not necessarily increase overall labor expense – assuming those employees do not regularly work overtime for which they would not have to be paid 1.5 times their hourly wage.
At a minimum, prior to January 1st, employers should complete a review of their exempt employees’ salaries to identify those who would not meet the new annual salary, and decide on the best path forward for those employees. Note: the analysis need not be an “all or nothing” approach. Employers may have the flexibility to convert some employees to non-exempt status, while raising other exempt employees’ salaries to meet the DOL’s new increased minimum salary. Although the DOL disfavors classifying employees solely to avoid paying overtime, employers may legitimately decide that some current salaried job classifications (e.g., administrative professionals who regularly work over 40 hours) would be best left as exempt, while deciding that different job classifications would be best converted to hourly, non-exempt status.
C. Other Considerations Beyond Salary: The Duties Test
The “salary basis test” discussed above is very straightforward — does the employee’s annual salary meet the minimum threshold or not? If no, then they ‘fail’ the test and cannot be classified as an exempt, salaried employee. If the employee passes the “salary basis test,” then their job duties must be examined to make sure that they fall within one of the recognized FLSA exemptions.
The four most commonly used exemptions include the following:
- Executive
- Professional
- Administrative
- Computer Professionals
The FLSA’s “Executive” exemption is reserved for those employees who perform a relatively high-level of work, requiring the employee to perform important jobs relate to the overall management of the company.
Some areas of consideration when performing the executive duties test include the following:
- Does the employee regularly supervise two or more other employees?
- Does the position have management as the primary duty of the position?
- Does the position have some genuine input into the job status of other employees (such as hiring, firing, promotions, or assignments)?
To qualify for the “Professional” exemption under the FLSA, employees must perform work that is predominantly intellectual, that requires advanced education, and involves the exercise of discretion and independent judgment. Employees who qualify for this exemption must have education beyond high school, and usually beyond college. Advanced degrees are commonly used to satisfy the education requirement (e.g., doctors, lawyers, CPA’s, architects), but are not absolutely necessary if an employee has attained a similar level of advanced education through prolonged work experience.
The “Administrative” exemption is the most difficult to apply consistently. The administrative exemption is designed for employees whose main job is to “keep the business running.” Specifically, “the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.” And the employee’s primary duty must include “the exercise of discretion and independent judgment with respect to matters of significance.”
Typically, Administrative employees provide “support” to the operational or production employees. They are “staff” rather than “line” employees. Examples of administrative functions could include labor relations and personnel (human resources employees), payroll and finance (including budgeting and benefits management), records maintenance, accounting and tax, marketing and advertising, quality control, public relations (including shareholder or investment relations, and government relations), and regulatory compliance.
To be an exempt “Computer Professional,” the employee must be a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field. An employee who utilizes a computer to perform a majority of their tasks usually will not meet this exemption on that basis alone. In addition, employees whose job entails “troubleshooting” or repairing computers or solving “glitches” or equipment malfunctions will generally not meet this exemption. Interestingly, the “Computer Professional” is the only class of exempt employee that can be paid on an hourly basis of not less than $27.63, instead of a salary basis, and still be “exempt” from the FLSA’s overtime requirements.
D. Takeaway for Employers
The DOL’s new minimum salary threshold for its overtime exemptions is estimated to make an additional 1.3 million workers eligible for overtime. The new year will arrive before you know it. Employers should act now to identify any exempt employees in their organization that may be affected by the new rule and to decide how best to compensate those employees given the increased salary threshold. But as we discussed above, salary is only one component of determining whether an employee is “exempt” from overtime. Smart employers will use this intervening few months before the new salary level takes effect to also review the employees’ job duties to make sure all their employees are paid appropriately and classified correctly as exempt or non-exempt under the FLSA, as well as any applicable state laws that might set requirements higher than the FLSA.
C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.
[1] The DOL’s informational Fact Sheet #17A is available online and provides further analysis of the most common overtime exemptions: https://www.dol.gov/whd/overtime/fs17a_overview.pdf
