U.S. Department of Labor Final Overtime Rule to Take Effect January 1, 2020
The U.S. Department of Labor (DOL) just unveiled a final rule updating the Fair Labor Standards Act’s overtime and minimum wage exemptions for executive, administrative, and professional (EAP) workers. This rule raises the standard salary threshold to $684 per week, or $35,568 per year, for an employee to qualify as exempt. Effectively, this salary adjustment increases the number of workers eligible for overtime pay by 1.3 million workers. As the effective date is fast-approaching, it is important to understand your options and how to comply when January 1, 2020 rolls around.
How Did We Get Here?
A final rule by the DOL has been looming since a threshold increase was proposed by the Obama administration back in 2016. The administration proposed a threshold of $47,000-more than double the current threshold set back in 2004-and wanted future increases to be tied to changes in the cost of living. A federal judge in Texas invalidated the proposal in 2017, causing the current administration to seek a more modest proposal. The final rule appears to be a compromise between businesses and employees, increasing the current threshold by $12,000 and not providing for future increases.
How Should Employers Respond?
With the final rule taking effect on January 1, 2020, employers will have the next 95 days to comply with the new rule. Although a tall order, understanding your options as an employer will help accelerate the process and ease the transition into the New Year.
The primary task for employers will be to analyze the status of all employees who earn below the new salary threshold but are currently classified as exempt. With regard to these employees, employers will have two options: (1) reclassify such employees as nonexempt hourly workers, or (2) increase the salaries of such employees over the new threshold to keep them eligible for the EAP exemption.
Should an employer choose to reclassify employees as nonexempt hourly employees, the employer must ensure there are available funds to cover overtime expenses or it may have to implement procedures to legally and properly limit overtime hours and/or shift additional work elsewhere to mitigate the increased cost. This reclassification will entitle the affected employee to overtime pay for any overtime hours worked, which some employees may view positively. However, reclassification to nonexempt may decrease morale if affected employees view their new nonexempt status as a demotion.
If an employer chooses to increase an employee’s salary to remain eligible for the exemption, the employer must still assess and confirm that the employee’s job duties qualify them for an EAP exemption. This option excludes the employee’s ability to receive overtime compensation but maintains the intrinsic value of being an exempt employee.
Once employers determine how they will proceed with employee classifications, it is important to understand the increased costs of complying with the DOL’s final rule. An increasing number of nonexempt employees will result in new expenses for the company such as increased overtime, administrative expenses associated with tracking overtime, and costs associated with nonexempt benefits such as paid vacations.
However, the most pivotal investment in the process will be taking the time needed to effectively communicate the impacted employees’ newly-classified nonexempt status so they understand their expectations and the new procedures they need to follow, and still feel appreciated for the value they provide. This step is often overlooked but is important to the overall success of the process and to ensure employee job satisfaction.
Where Can You Go From Here?
If there are any questions or uncertainty, it is important to involve counsel early in the process for a couple of reasons. First, involving a lawyer can help confirm proper employee classification, which can be complicated and tricky. Second, it will help reduce exposure to legal scrutiny down the line in the event of an audit or investigation by the DOL or legal challenge by the employee.
If you have any questions about the above alert or are interested in learning more about how to comply with the new requirements, AJ can be reached at email@example.com or reach out to Heidi Carpenter (head of HR & Employment practice) at firstname.lastname@example.org or Shannon McDonough at email@example.com (head of HR & Employment practice).