Important Changes to Overtime Coming January 1, 2020: Is Your Company Ready?

Oct 22, 2019

On September 24, 2019, U.S. Department of Labor announced a new final rule updating regulations issued under the Fair Labor Standards Act (FLSA). The new final rule, which goes into effect on January 1, 2020, raises two key compensation thresholds above which executive, administrative, and professional employees are exempt from overtime.

How Many People Will Be Impacted?

The Department of Labor estimates that these updated compensation levels will result in 1.3 million American workers who are currently exempt from overtime becoming nonexempt, i.e., subject to overtime requirements.

What are the Key Changes to Overtime Exemption?

First, the minimum, “standard salary level” above which qualified executive, administrative, and professional employees may be exempt from overtime increases from $455 per week to $684 per week (equivalent to $33,568 per year).

Second, the total annual compensation level for “highly compensated employees” (HCE) increases from $100,000 to $107,432 before an employee qualifies as HCE and thereby exempt from overtime. The HCE must also be paid at least $684 per week on a salary or fee basis (the standard salary level).

Why These Increases, and Why Now?

The Department says the change is needed to keep pace with growth in wages and salaries. The figures continue to be calculated in the same manner as they were when they were last set in 2004. The standard salary level is set at the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (the South) and/or the national retail sector. The total annual compensation for HCE continues to be pegged at the 80th percentile of full-time salaried workers nationally. Looking ahead, the Department advises that it intends to update these thresholds more regularly through notice-and-rulemaking procedures, to decrease the disruption to businesses that results from less frequent, larger adjustments.

What About Nondiscretionary Bonuses and Incentive Pay?

In recognition of evolving pay practices, employers may now credit nondiscretionary bonus and incentive payments toward up to 10% of the standard salary level.In order to qualify for this credit, such bonuses and payments must be payable at least annually. For employees who do not earn enough nondiscretionary bonuses or incentive payments in a given year to retain their exempt status, employers may also make one “catch up” payment within one pay period of the corresponding 52-week period. That catch-up payment will apply toward the prior 52-week period’s annual salary, rather than to the salary year in which the catch-up payment is actually made.

What Should I Do Now?

If your business employees any of the 1.3 million currently exempt employees about to become non-exempt, it is critical that you plan now for 2020. You should consult with your employment attorney immediately to determine if you will be impacted, and to insure that your company is compliant with the new regulations when the ball drops in Times Square on New Year’s Eve.

Whether you intend to adjust compensation upward to preserve exemption, or elect to allow previously exempt employees to become overtime eligible, a skilled employment attorney is essential to help you identify impacted employees, analyze your best options and guide you through the appropriate changes to compensation structures, employment contracts and payroll practices.

The final rule is available at: http://www.dol.gov/whd/overtime2019. For further questions about the new final rule and how it affects your business or employment, contact employment attorney Adam Tarr at Pugh Hagan Prahm, PLC at (319) 351-2028 or atarr@pughhagan.com.



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