The U.S. Department of Labor (DOL) has issued the long-anticipated final version of its overtime eligibility rules. The changes will take effect on January 1, 2020. As a result, the DOL estimates that 1.3 million workers will be newly eligible for overtime pay. Are any of them on your payroll? Read on to find out.
The basic change that takes effect next year is that employees, even if their jobs can be properly classified as executive, administrative or professional, are still eligible for overtime pay unless they earn at least $684 per week. That’s the equivalent of a $35,568 annual salary. The previous “white-collar” employee threshold, set in 2004, was $455 per week or $23,660 per year.
According to the DOL, the updated amount will “set an appropriate dividing line between nonexempt and potentially exempt employees by screening out from exemption only those employees who, based on their compensation, are unlikely to be bona fide executive, administrative, or professional employees.”
In addition, the annual income threshold for overtime pay eligibility for “highly compensated employees” (HCEs) has increased from $100,000 to $107,432. Employees whose jobs don’t come under the executive, administrative or professional classifications must earn at least that amount to lose eligibility for overtime pay.
The new HCE threshold was set at the 80th percentile of weekly earnings of salaried workers nationwide. That’s down from the 90th percentile in the earlier proposed version of the new rule.
How Will Bonuses Factor into the Overtime Equation?
Some earnings that aren’t part of the employee’s regular pay can be added to their base pay when calculating where they are in relationship to the exempt threshold. Specifically, a formula-based extra pay component that’s not discretionary — such as a bonus based on productivity, corporate profits or sales commission — can be added to base pay for overtime pay eligibility calculation purposes.
However, the variable pay component can’t represent more than 10% of that employee’s total pay. Also, it must be given no less often than annually to qualify.
On a positive note, the new rule gives employers the opportunity to make last-minute payments to push an employee into nonexempt status. According to the DOL, “If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given 52-week period to retain his or her exempt status, the Department permits a ‘catch-up’ payment at the end of the 52-week period.” The rules give an employer one pay period to make up for a shortfall of up to 10% of the standard salary level for the preceding 52-week period.
Does the “Duties Test” Still Apply?
The new rule doesn’t change the “duties test” that is the basis for determining exempt status. As a reminder, it’s not enough to give an employee an administrative, executive or professional job title and deem the employee exempt. If an employee sues, asserting entitlement to overtime pay, the focus will continue to be his or her actual job function.
This means, beginning next year, any employee that you’ve classified as exempt based on having an administrative, executive or professional job, who earns from $35,568 to $107,432, could challenge that status if the job doesn’t meet the applicable duties test.
For example, the DOL considers a job eligible for exempt status under the “administrative” classification if the employee’s primary duty is “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 includes the exercise of discretion and independent judgment with respect to matters of significance.”
How Should Employers Prepare for the Changes?
To prepare for the 2020 effective date of the new regulations, employers should review their payroll records for workers in the following pay ranges:
Employees earning from $23,660 to $35,567. For workers in this pay range who are treated as exempt and are properly classified based on the duties test, you have two options: 1) Treat them as eligible for overtime pay and set up your hours-worked tracking and payroll systems accordingly, or 2) increase their annual salary to at least $35,568.
Employees earning from $35,568 to $107,432. Workers in this pay range who are treated as exempt based on one of the administrative, executive or professional job categories could be eligible for overtime pay if they fail the duties test. You have two choices for these workers: 1) Reclassify them as nonexempt, or 2) adjust their job duties to make them legitimately exempt.
Important: Just because a formerly exempt employee gains nonexempt status doesn’t make overtime pay inevitable. You can minimize overtime pay by carefully tracking workhours and requiring manager authorization for employees to work beyond 40 hours in a given week.
When the DOL issued its final overtime rules, the agency acknowledged that 15 years is a long time to wait to adjust the overtime pay thresholds. The DOL “intends to update the standard salary and HCEs total annual compensation levels more regularly in the future through notice-and-comment rulemaking.” Contact your tax and payroll professional for more information on the new rules and assistance on implementing the changes.