New Overtime Rules in Effect January 2020
In September, we warned you that changes to Federal overtime rules were coming, which you can find at https://kewlaw.com/whats-the-magic-number-final-overtime-rules-announced/. Well, as you were ringing in the new year, these new rules were made official.
The Fair Labor Standards Act (FLSA) dictates federal overtime rules including which employees are eligible for overtime (non-exempt employees) and which employees are exempt from overtime (exempt employees.)
FLSA Overtime Exemption Tests
Under the FLSA, employees performing executive, administrative, or professional services are exempt from overtime (“EAP exemption”) if they meet three tests:
- The salary basis test
- The salary level test and
- The job duties test.
What is NOT changing?
The job duties test is not changing one bit. For more on the job duties test, head over to https://kewlaw.com/whats-the-magic-number-final-overtime-rules-announced/.
What IS changing?
Portions of the salary basis test and the salary level test.
What does it mean to be paid a salary?
For overtime/exemption purposes, a salaried employee regularly receives the same predetermined amount of compensation per week, regardless of whether they work one hour or eighty in a week.
An employee must be paid on a salary basis to be considered exempt from overtime.
Keep in mind, salaried ≠ exempt!
The Salary Basis Test
The new rule allows employers to pay ten percent of an employee’s weekly salary in nondiscretionary bonuses or incentive payments paid at least annually. A nondiscretionary bonus or incentive payment is a form of compensation given automatically to employees, such as bonuses for meeting set production goals, retention bonuses or commission payments earned pursuant to a fixed formula. On the flip side, a discretionary bonus is one that is not given automatically or pursuant to any pattern. For example, an employer may have a good quarter and decide to give each employee a one-time payment of $50.
How does this new ten percent rule come into play?
An employer who pays their employee ninety percent of the updated weekly rate every week for a year, and then pays the remaining ten percent in nondiscretionary bonuses, is complying with the requirements for that employee to remain overtime-exempt.
The Salary Level Test
The largest and most discussed change involves the salary level test. Previously, the salary threshold for overtime exemption was $455 per week. Now, employers must pay their employees $684 per week to maintain their exempt status, for a total of $35,568 annually.
Example using the new ten percent rule
As mentioned above, nondiscretionary bonuses can constitute up to ten percent of the $684 per week/$35,568 per year. If this is the route the employer chooses, then the employee only needs to be paid, at minimum, $615.60 per week if the remaining ten percent is paid in bonus or incentive pay. As a side note, discretionary bonuses do not count towards this weekly rate at all.
Catch up payment
The new rules also allow an employer to make a catch-up payment. If, at the end of a 12 month period, the employee does not earn enough to equal a yearly salary of $35,568/weekly salary of $684, the employer has one pay period to pay off the shortfall or the employer must backpay any overtime hours worked for the entire year. The “12 month” period can be chosen, in advance, by the employer and need not necessarily be based on the fiscal or calendar year.
Highly Compensated Employees
As an offshoot of the EAP exemption, the FLSA allows an exemption (“HCE exemption”) for “highly-compensated employees” (“HCE employees”). An employee is exempt if they are paid a certain amount, their primary duty involves office or non-manual work and they “customarily and regularly” perform duties as described in the job duties EAP exemption test.
HCE Salary Level Raised
The new rules raise the salary level to meet the HCE exemption from $100,000 to $107.432 per year. To meet these criteria, employers must still pay HCE-exempt employees at least $684 per week in regular salary, and the remaining salary owed throughout the year can be earned through non-discretionary bonuses/commissions. However, under the HCE exemption, an employer must pay the entire $684 per week. Non-discretionary bonuses cannot account for ten percent of that weekly salary as they can for non-HCE employees in the standard analysis described above.
Not sure how this may affect you and your business? Contact KEW!
Keep in mind that these changes affect only two prongs of a three-prong test of only one basis for exemption. Kramer, Elkins, & Watt can help your business navigate these rule changes. We can help you determine where your employees stand regarding overtime exemptions, whether any employees lost their exempt status, and whether payment would be a discretionary or nondiscretionary bonus. If any of your employees are no longer exempt due to these changes, we can help you decide whether it is more cost-efficient to pay these employees for any overtime or raise their base pay to meet the new thresholds. Not knowing or ignoring these rules can seriously harm your business, as your business may be liable for fines, fees, or penalties in addition to back pay.