New overtime rules proposed this year by the Department of Labor could make more than 1 million U.S. employees eligible for overtime. The proposal helps to address the uncertainty that has been swirling since a federal court struck down an Obama-era overtime proposal in 2016.
The proposed rules are currently open for comment, and it’s expected that thousands of stakeholders will weigh in. Though finalization is not expected until 2020, employers should start thinking now about the proposed impacts to their business. In particular, small and mid-size companies without a robust HR structure in place may be more susceptible to costly mistakes if last-minute compliance efforts are made hastily.
Here is the key information and potential actions businesses can consider now.
Under the proposed rules, the new salary threshold for overtime pay would increase from $23,360 to $35,308. Employers can begin the process of analyzing current pay information and identifying exempt employees who are paid below the new proposed salary threshold.
Remember that exempt does not simply mean an employee is salaried. In order to be considered exempt, a position must meet the following criteria:
- The primary job duties must meet the requirements set forth in applicable exemption (for example: the executive, administrative or professional exemption).
- The employee is paid on a salary basis not subject to reduction based on quality or quantity of work.
- The salary meets the applicable threshold level.
Review job descriptions to ensure they are still accurate, and to ensure exempt employees are actually performing the tasks in the job description. Then, conduct a cost-benefit analysis of raising employees’ salaries to meet the new threshold, or reclassifying them as non-exempt and paying overtime when they work more than 40 hours a week.
Keep in mind – there is more to consider than the bottom line. Job reclassification can bear a significant impact on employee morale and must be completed in a matter that considers the organization holistically to avoid legal claims stemming from inequities that may arise.
The total annual compensation requirement for “highly compensated employees” increases from $100,000 to $147,414 per year. Currently, an annual salary of $100,000 is the level which qualifies a “highly compensated employee” (HCE) for overtime exemption if the employee performs non-manual work that is one of the duties of an exempt executive, administrative or professional employee.
The HCE salary threshold could increase significantly, making about 200,000 high-earning workers newly overtime-eligible according to Department of Labor estimates. The economic impacts for affected businesses could be enormous. Some employers will have to weigh an expensive choice – pay overtime rates that could exceed $100/hour or raise salaries over the new threshold. It will be important for these businesses to examine compensation rates, duties, and financial implications.
Employers may use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the recommended salary levels. Instead of bumping pay to $35,308, there may be circumstances where an employer wants to consider using bonus payments to achieve the new salary threshold levels. This might include businesses seeking to motivate employees or those with seasonal or cyclical revenues.
But proceed with caution because these payments must be non-discretionary, and these decisions can present an unforeseen minefield of consequences. Employers should consider the extra burden of monitoring bonuses to ensure salary-level compliance and the possible financial and legal ramifications if a mistake is made.
The employment law attorneys at Carmody MacDonald will continue to monitor the Department of Labor’s proposed overtime rules. In the meantime, businesses that want to prepare a strategic plan that thoroughly considers the financial and legal impacts can contact one of our attorneys for guidance.
Tracy Vandover is Legal Counsel at Carmody MacDonald where she represents individuals, owners of closely-held businesses and corporations in the areas of employment law. Contact Tracy at [email protected] or 314-854-8696.
Candace Johnson is an attorney at Carmody MacDonald and focuses her practice in the areas of labor and employment, real estate, and general civil litigation. Contact Candace at [email protected] or 314-854-8647.
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