Attention SMBs: New Overtime Rule Issued by the Department of Labor

At the end of September, the Department of Labor issued a new overtime pay rule that will take effect on January 1, 2020.

According to the Department of Labor, the new rule will make 1.3 million American workers newly eligible for overtime pay. It is important for small businesses with employees to be aware of the changes to avoid violating the rule by misclassifying their employees, which could result in the payment of back overtime, civil or criminal penalties, and damages.

The Basics
Under the Fair Labor Standards Act (FLSA), employers must pay employees overtime pay (1 ½ times their regular hourly rate) for hours worked exceeding 40 hours in a workweek unless the employees are exempt because they are (1) paid a salary (2) of at least a minimum amount and (3) meet certain tests regarding their job duties. Although there are some exceptions, generally, the following tests must be satisfied:
      1. Payment of a salary: For an employee to be exempt from overtime requirements, the employee must be paid a predetermined and fixed salary that will not be reduced based on the quantity or quality of the work performed.
      2. Payment of a minimum salary: The salary must be of a certain minimum amount specified by law.
      3. Duties test: The employee’s primary job duties must fall within the categories of executive, administrative, professional, outside sales, or computer employees. Certain highly compensated employees who meet a more relaxed duties test are also exempt.

What Has Changed?
The recent changes in the overtime rule impact the second test, i.e., the requirement of payment of a minimum salary. The change that is most likely to have an impact on small businesses is a substantial increase in the amount of the minimum salary. The new overtime rule increases the minimum salary from $455 a week ($23,660 annually) to $684 a week ($35,568 annually). So, employees who make less than $684 a week will need to be paid overtime under the new rule if they work more than 40 hours during a workweek, even if they are paid a salary and meet the duties test mentioned above. Small businesses need to consider how this will impact their budgets and whether it makes more sense to increase the amount of an employee’s salary so the employee can retain exempt status or begin to pay overtime to an employee that is no longer exempt from the FSLA’s overtime requirements.

The rule also makes several other changes:
      • The threshold for highly compensated employees will be increased from $100,000 per year to $107,432 per year (at least $684 must be paid weekly on a salary or fee basis). Thus, highly compensated employees who are paid the new minimum salary will be exempt from overtime pay requirements as long as they continue to meet the less stringent duties test applicable to them.
      • Employers can use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of an employee’s minimum salary, as long as those payments are made at least annually. Therefore, an employee can pay $68 of an employee’s $684 per week salary using those types of payments without causing the employee to lose his or her exempt status. Discretionary bonuses cannot be used to satisfy the minimum salary level requirement.
      • The new overtime rule also revises salary levels for workers in U.S. territories and in the motion picture industry.

What Has Not Changed?
The first and third requirements mentioned above, i.e., the requirement of payment of a salary and the duties tests, are not changed by the new rule. Thus, although it is prudent to do a periodic review to ensure that you are complying with FLSA requirements if your employees currently meet those tests, they will continue to meet them under the new rule.