The U.S. Department of Labor's (DOL) Final Overtime Rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, was adopted Sept. 24, 2019, and will expand current federal overtime regulations. For many companies, it may change the amount of their payroll or cause them to alter their workforce or operations. The DOL estimates that the new salary level under the proposed rule would expand overtime to 1.1 million workers, and the cost to employers in the first year the rule is in effect would be $464.2 million. But the overtime rule won't necessarily impact all exempt employees, so make sure you understand which employees may be affected.
Current overtime rule at a glance
Non-exempt employees still must be paid time-and-a-half their regular rate of pay for any hours worked over 40 in a work week. For example, if an employee normally receives $20 per hour and works 45 hours in the work week, and no other compensation is received, the employee must be paid $30 per hour (1½ times their regular rate of pay) for five hours.
Special overtime rules apply for workers in the food service industry. For tipped employees, overtime is calculated on the full minimum wage, and not the lower direct (or cash) wage payment. For non-tipped hourly employees, overtime is based on the employee's regular rate of pay. For salaried employees, new overtime rules explained later may come into play.
For workers in all industries, the basic time-and-a-half rule has not changed. What has changed is the salary threshold for the white-collar exemptions subject to the salary test.
An important note: Employers in the private sector cannot avoid the overtime rule by offering "comp time." Thus, employers cannot offer employees who work more than 40 hours in a week and the option to work fewer hours in the next week in lieu of paying them the applicable overtime rate for hours worked over 40 in the first week.
What is the impact of the Final Overtime Rule?
Currently, an employee who is paid on a salary basis at a threshold that meets or exceeds the current salary threshold of $455/week ($23,660/year) and who meets the duties test of either the executive, administrative or professional (called "EAP exemption") are not subject to the overtime rule.
The Final Overtime Rule will increase the salary thresholds to $684/week ($35,568 if they work the entire year). However, the proposed amounts will still be lower than what had previously been set to take effect in 2016 ($913/week or $47,476/ year); it was enjoined in the courts and never became effective.
Under the proposed rule, an employer may apply incentive payments including non-discretionary bonuses and/or commissions up to 10 percent of the salary threshold where those payments are paid annually or more frequently.
And finally, the Final Overtime Rule, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees, does not include changes to the job duties tests nor is there a provision for automatic adjustments to the salary threshold included. The DOL did, however, reaffirm its intent to update the earnings threshold more regularly in the future through notice-and-comment rule-making procedures.
Highly Compensated Employees (HCEs)
There is one additional type of employee who will be impacted by the Final Overtime Rule: those employees who currently meet the Highly Compensated Employee exemption. Currently, this exemption requires the employee to be paid on a salary basis, receive a weekly salary of at least $455/week, earn an annual salary of at least $100,000/year, and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee. Under the Final Overtime Rule, starting Jan. 1, 2020, these employees must continue to meet the applicable duties test, and must earn an annual salary projected to be $107,432.
Retail commissioned employees
If you are a retail establishment, employees paid on a commissioned basis who meet the exemption under Section 7i from overtime under the Fair Labor Standards Act will not be impacted by the Final Overtime Rule.
The outside sales white collar exemption does not have a salary basis requirement and therefore employees who meet this exemption also are not impacted by the Final Overtime Rule.
What are next steps for employers with the Final Overtime Rule?
Many employers had made adjustments in pricing, staffing, work scheduling, and other matters ahead of the anticipated final rule that was scheduled to take effect in 2016. Those employers who did not previously take action should do so now to cover the potential increases in payroll if they decide to increase salaries to retain the exempt status of their impacted employees, or the potential increase in overtime costs where these employees are transitioned to non-exempt status and become eligible for overtime pay.
“Paychex has been working with clients to help them prepare for the adoption of the final rule,” said Tammy Tyler, employment law compliance manager at Paychex. “Now that it is here, we are encouraging our clients to review and update their job descriptions and compensation levels to better identify which employees may need to be reclassified. Employers should also consider time and attendance systems to simplify the recordkeeping process.”
Also, remember that salary is only one part of the criteria for an exemption from the overtime provisions of the Fair Labor Standards Act; duties performed by employees is another. Consider reviewing the duties tests under the existing regulations; job title is not controlling.
Of note, individuals correctly classified as independent contractors are not covered under the Fair Labor Standards Act and therefore are not eligible for overtime pay. However, you cannot merely call a worker an independent contractor in order to avoid overtime pay requirements if the worker, in fact, meets the criteria of a covered employee. Consider your options carefully before moving forward to ensure your full compliance with the new overtime rule when it goes into effect.