What Does Proposed Overtime Rule Mean to Employers?

The proposed federal overtime rule isn’t expected to take effect until January 2020, but employers may need to start planning now if they have exempt employees who are earning less than $35,308 a year.

Employees must perform certain duties and earn a minimum salary to be classified as exempt from overtime pay under the Fair Labor Standards Act’s executive, administrative and professional exemptions. The Department of Labor (DOL) is seeking to raise the threshold to $679 a week ($35,308 a year) from $455 a week ($23,660 a year) — though nothing has been finalized yet.

If the proposal is adopted, exempt employees who currently earn less than $679 a week would need to be given a raise to meet the new threshold. Otherwise, they would have to be reclassified as nonexempt and paid overtime premiums for any hours worked beyond 40 in a workweek.

The DOL expects that more than a million currently exempt workers would be reclassified to nonexempt.

Employers should not forget that the DOL’s proposed rule has no bearing on state law. If applicable state law imposes a higher minimum salary requirement or a more onerous duties test, employers in that state must continue to comply with state law.

Here are some tips to help employers decide whether to reclassify workers or increase their pay.

Calculate the Costs

The main consideration is the amount of anticipated overtime the employee would be paid if reclassified to nonexempt. If the employee would earn more in overtime premiums than he or she would earn with a salary increase that preserves the exemption, then a salary increase probably makes business sense.

Keep in mind that nondiscretionary bonuses and commissions paid on an annual or more frequent basis could be used to satisfy up to 10 percent of the standard exempt salary threshold under the DOL’s proposal.

Note that reclassifying an employee to nonexempt can create administrative costs, because employers would need to track workers’ hours and calculate overtime pay. Reclassified employees may have to adjust to new procedures.

Look at the Bigger Picture

Employers should examine whether reclassifying employees who fall below the new salary threshold would result in some employees in the same job being exempt while others are nonexempt.

Giving raises only to workers who need an adjustment to meet the new exempt salary threshold can also cause problems.

Employers might want to consider increasing pay for employees in the same job who are paid more than the new minimum salary, but they may also want to take this opportunity to review their pay practices and determine the reasons for any pay disparities before any increases are finalized.

Develop a Communication Strategy

Reclassified employees are often concerned about how their level of compensation and benefits may change, how to record time worked in the timekeeping system, and how the reclassification may impact their opportunity for advancement.

Managers will want to know how the change may impact how they interact with their employees. For instance, managers may not have previously been as concerned with how much time it took employees to get a job done or whether employees were working after hours or on weekends.