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DOL Raises Minimum Salary Requirement for Overtime Exemption

Key Points:

  • Starting January 1, 2020, employees who are currently classified as exempt but earn less than $684 per week ($35,568 per year) will become eligible for overtime compensation
  • To comply, employers can increase salaries to the new standard of $35,568 or retain current employee salaries and compensate any overtime hours
  • Employers can prepare for this change by identifying the employees who will be affected, carefully tracking overtime, and deciding if increased salaries or increased overtime wages will be more cost-effective

The Department of Labor first proposed changes to the overtime laws recorded in the Fair Labor Standards Act (FLSA) back in March and, after some delays, the final salary cutoff was announced on September 24. Effective January 1, 2020, the change will increase the standard salary level from $23,660 to $35,568, meaning that about 1.3 million additional employees could become eligible for overtime wages.  

Before we tell you more, we need to mention one thing: this article talks about how overtime eligibility might be affected using the salary level test. The other tests you can use to determine overtime compensation have not changed. Just because you have employees who make over $35,568 doesn’t mean that they will automatically be exempt from overtime compensation. You’ll need to consult other qualifiers, like the duties test, for the most accurate overtime estimates. Now, let’s begin. 

Under the current federal overtime law, any employee who is covered by the FLSA and makes less than $23,660 per year (or $455 per week) is eligible for overtime pay if they work more than 40 hours per week. With the change to the FLSA, though, any employee covered by the FLSA who earns less than $35,568 per year (or $684 per week) will become eligible for overtime wages in 2020. If these employees work more than 40 hours per week, they must be paid time and a half of their regular pay. Keep in mind that every state has their own overtime regulations in addition to this federal law, so the overtime criteria may vary depending on where your business is located. We recommend comparing your local laws to the federal standards to ensure you’re following the correct ones.

With this new law, the required salary that constitutes a highly compensated individual will also be raised from $100,000 to $107,432. Meaning, highly compensated employees who currently earn more than $100,000 (and are exempt from overtime pay) may become eligible for overtime compensation in 2020 if their annual earnings are below the $107,432 mark. Again, this change could result in employers paying additional overtime rates. Exemption rules for highly compensated employees also vary by state.

To meet the new standard salary level requirement, your organization may use discretionary bonuses and commissions. However, these can only be used for up to 10% of the standard salary level. This means that you will only be able to rely on bonuses and commissions up to $3,556.80 (or $10,743.20 for highly compensated employees) in 2020. If an employee’s salary still hasn’t reached the standard salary level even with the maximum additional bonuses and commissions, your organization will still need to pay overtime wages, provided the employee is not exempt due to other overtime tests.

When facing this new overtime law, you and your organization can remain compliant by:

  1. Cutting back on employee overtime,
  2. Increasing salaries to the standard salary amount (factoring in discretionary bonuses and commissions, if applicable), or
  3. Paying overtime wages to more employees

How to Prepare: The Salary Level Test

Cutting back on overtime is often difficult for many businesses, which leaves you with only two viable options: increase salaries or pay overtime. To help you smoothly transition into January, here are a few ways to get organized and decide which option is best for your organization. 

  • Assess Current Employees
    Before the end of the year, take a look at your employees to see who will be affected by this change. Which employees receive a salary between $23,660 and $35,568? Will current employees unaffected by overtime remain exempt?
  • Carefully Track Overtime Hours
    With the introduction of this new law, more employees are potentially eligible for overtime compensation. This means you’ll probably have more numbers to track, and accurately logging overtime hours for any employee earning less than $35,568 will be crucial for auditing and payroll purposes. To help you maintain accurate records, Sentric offers timekeeping services that will track overtime and salaries for you, making it easy to comply with the new law.
  • Make a Cost-Effective Decision
    Whether you decide to increase salaries or pay the added overtime wages depends on your business: the number of employees you staff, how close employee salaries are to the $35,568 mark, and the amount of overtime accrued on average. Will this new law affect a vast portion of your workforce or just a few employees? On average, how many overtime hours does your organization log? How many overtime hours would be needed to cancel out the cost of a salary raise for employees?

If you need help answering these questions, reach out to your payroll provider and they’ll be happy to assist you. 

If you’re a Sentric client, we’ve compiled the overtime data for you in an easy-to-read report. Our FLSA overtime report shows the difference between each employee’s salary and the new $35,568 threshold so that you can make the best decision for your organization. If you are interested in receiving this report, please contact your Sentric Representative.