Federal Changes to Employee Overtime Compensation Effective January 1, 2020

The U.S. Department of Labor recently announced an update to the Fair Labor Standards Act (FLSA) for the first time in 15 years. The changes effect both the classification of “exempt” and “non-exempt” employees, as well as an increase from current overtime payment standards. The new rule will extend overtime protection to 1.3 million workers, and includes regulatory qualifiers such as occupation and annual compensation to determine overtime eligibility. Exclusions from FLSA coverage can be found at flsa.com/coverage.

As of January 1, 2020, the salary threshold for an “exempt” employee will increase from $455 to $640 per week or $35,568 annually. This means that workers who do not earn maximum threshold amount will be entitled to overtime pay. In addition, the salary threshold for “highly compensated employees” will also increase from $1,932.08 per week to $2,066 per week, or $107,432 annually.  The IRS defines highly compensated employees as:

• Owned more than 5% of the interest in a business at any time during the year or the preceding year, regardless of how much compensation that person earned or received
• For the preceding year, received compensation from the business of more than $125,000 if the preceding year is 2019; and $130,000 if the preceding year was 2020, and, if the employer so chooses, was in the top 20% of employees when ranked by compensation

The law change also applies to bonuses and/or commissions. Employers will be able to use nondiscretionary bonuses, commissions or other incentive-based payments to satisfy up to 10% of the salary level for employees under the standard exemption. 

Key Overtime Changes

1. Raise "standard salary level" from the currently enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker)
2. Raise total annual compensation level for "highly compensated employees (HCE)" from the currently enforced level of $100,000 to $107,432 per year
3. Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices
4. Revise the special salary levels for workers in U.S. territories and in the motion picture industry.

Exempt vs. Non-exempt

There are a few ways to determine if an employee falls under exempt or non-exempt status. For example, certain job categories and professions are excluded from the above classification test such as outside sales, lawyers, doctors, teachers, and certain computer-related occupations that earn at least $27.63 per hour.  There are also three (3) job categories that are exempt:

1.     Executive

2.     Professional

3.     Administrative

The FLSA has outlined the following requirements to classify an employee as exempt and employees must meet all three test requirements to be considered exempt.  

• how much the employee is paid (employees paid less than $23,600 per year are non-exempt)
•  how the employee is paid; guaranteed minimum, hourly/salary, etc. (salary basis test)
• what kind of work the employee does (job duties test)

Challenges for Employers

The new overtime rule has the potential to increase labor costs up to 50% or more for some employers making it essential to redistribute labor. Inflated labor costs will affect profit margins, and employers should start making long term HR plans to adjust to the new regulations and manage overtime. 

Workforce overhaul can be complicated and have far reaching operational and administrative impacts. Complying with new regulations, while still maintaining productivity levels, can convolute workplace culture and morale. In addition, workforce changes can effect compliance in other areas, such as employer-based benefits like health insurance, worker’s compensation and other unforeseen administrative legalities.