Payroll Alert: Many More Employees Will be Overtime Eligible Starting January 2020

From: The Greater Cleveland Partnership

By: Mark Turner and Cindy Menta-Gertsburg Law Firm

The U.S. Department of Labor (DOL) issued a new final overtime rule on September 24, 2019 that increases the Fair Labor Standards Act’s (FLSA’s) salary-level threshold for white-collar exemptions from $455 per week ($23,700 annually) to $684 per week ($35,568 annually). This overtime rule goes into effect January 1, 2020 and is estimated to extend overtime protections to an additional 1.3 million workers nationwide who are currently ineligible under federal law.

Who is covered by the new overtime rule?

Generally, the FLSA applies to employees of enterprises that gross $500,000 or more annually, are engaged in interstate commerce, or are engaged in the production of goods for commerce. In addition to the general rule, employees of certain companies are also covered by the FLSA despite their amount of gross sales or business. These entities include hospitals, businesses providing medical or nursing care for residents, schools, and public agencies.

Under the FLSA, nonexempt employees must be paid time and a half for any hours worked more than 40 hours in a workweek. Meeting the salary threshold does not automatically make an employee exempt from overtime pay; the employee’s job duties also must primarily involve executive (primary duty is to manage the business), administrative (primary duty is office or non-manual work directly related to the management or general business operations) or professional duties (requiring advanced knowledge in a field of science or learning), as defined by the DOL. The DOL also makes exceptions to the overtime rule for employees that are primarily engaged in outside sales (regularly engaged away from the employer’s place of business in sales role) and computer employees (employed as computer systems analyst, computer programmer, software engineer or skilled worker in the computer field). Find more information about these tests on the DOL fact sheet.

Under the new final rule, there have been no changes to the longstanding DOL duties test. However, as of January 1, 2010, workers who make less than $35,568 per year must be paid overtime, even if they are classified as a professional or manager. Notably, nondiscretionary bonuses and incentive payments, including commission, may be used to satisfy up to 10 percent of the threshold salary level.

If, however, an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year to retain their exempt status, the DOL permits the employer to make a “catch-up” payment within one pay period at the end of the year. This payment may be up to 10 percent of the total standard salary. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.

Further, the special rule for “highly compensated employees” will now require such workers to earn an annual compensation of at least $107,432. This compensation level is equal to the 80th percentile of full-time salaried workers nationally. To be considered exempt as a highly compensated employee, the employee must also receive at least the new standard salary amount of $684 per week on a salary or fee basis (without regard to the payment of nondiscretionary bonuses and incentive payments).

What does the new overtime rule mean to employers?

Because the new rule will likely impact a company’s budget, employers should immediately begin planning for the implementation of the new overtime rule. It is particularly imperative that the company’s HR department understands the new rule so that they can determine which employees are exempt or non-exempt, then adjust payroll accordingly. Generally speaking, the new rule leaves employers with two options:

1) Give all nonexempt employees that make less than $35,568 a raise (or ensure an adequate qualifying bonus) to put them above the threshold, or

2) pay them overtime for all time they work in excess of 40 hours per week.

It is also important that the employer complies with its obligation to keep adequate records of employee status and time worked. Failure to do so may have serious implications, as it would put the company in violation of the FLSA, and potentially Ohio law as well.