After a lot of twists and turns, the U.S. Department of Labor (DOL) has finalized regulations making it harder for employers to classify lower-paid salaried employees as exempt from overtime pay.
You may remember that in the waning months of the Obama administration, the DOL tried to double the salary required to be paid to exempt employees (from $23,660 to about $47,000) to make up for decades during which the agency neglected to increase the limit to keep up with inflation. That increase was invalidated by a court, and the DOL has abandoned the proposal under President Trump.
Under the final rule, such employees will be entitled to overtime unless they are paid a salary of at least $35,568 per year, or $684 per week. That’s in addition to meeting certain other long-established requirements with regard to the type of work the employee performs.
The new rule also:
- Raises the total annual compensation requirement for “highly compensated employees” from the current level of $100,000 per year to $107,432 per year;
- Allows nondiscretionary bonuses, incentives, and commissions paid at least quarterly to count toward up to 10 percent of the required salary level; and
- Abandons plans to automatically review the minimum salary requirements for exempt employees every few years to determine whether additional increases are needed. It does, however, commit to undertaking such a review on a more regular basis in the future.
What should you do next?
The first step is to determine whether you have any employees classified as exempt who are paid a salary of less than $35,568 annually. If you do, some options to consider include:
- Increasing their salaries to at least $35,568 to maintain their exempt status;
- Maintaining their current salary (or an equivalent hourly rate), reclassifying them as nonexempt, and paying them overtime if they work more than 40 hours in a week; or
- Prohibiting them from working overtime (which may result in the need to hire additional staff).
Before you decide to take the easiest path of increasing the salaries of exempt employees, consider how that may impact your overall compensation structure. For example, what if doing so would result in the employees’ salary equaling that of those with more seniority?
With the new rules taking effect January 1, 2020, employers will need to work quickly to analyze the potential impacts and develop and plan for compliance.