Salary Threshold Increases: Now What?
April 5, 2021
What happened. Exempt employees, because of their rate of pay and type of work that they do, are not eligible for overtime pay for hours worked over 40 in a workweek. Non-exempt employees must be paid time and a half for any hours worked more than 40 in a workweek. On September 24, the Department of Labor announced a final rule changing the salary-test for determining whether an employee is Exempt or Non-Exempt. The new rule takes effect January 1, 2020.
Why this matters. The salary test for determining whether or not an employee is Exempt or Non-Exempt from the overtime provisions of the Fair Labor Standards Act (FLSA) is whether or not the employee in question earns at least the minimum salary as determined by Department of Labor (DOL) regulations. Increasing that threshold, potentially increases the number of employees eligible to earn overtime.
How did we get here. The current $455 weekly threshold was set in 2004. You may recall that in 2016, the Obama DOL attempted to essentially double the current threshold to $913 weekly – or from just over $23,500 yearly to $47,000 – and then going forward, it would have been indexed to inflation. Ultimately, this rule was blocked by a Federal judge and was never implemented.
What is the new rule. The new rule brings that number down to an inflation adjusted $679 weekly and will be adjusted every 4-years going forward after a public notice period. Additionally, the current threshold for highly compensated employees to be considered Exempt moves from $100,000 to $107,432. Non-discretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level.
“Non-discretionary bonuses” are generally defined as having an expectation of payment where the employer has no discretion regarding the amount and timing of payment and that payment is tied to employee performance or other specific standards or goals
What should I do to prepare. The salary test is but one test to be applied in determining whether or not your employee(s) are exempt or non-exempt. Generally speaking, If an employee earns an hourly rate, they’re most likely non-exempt with little exception. If they earn a salary after December 31, 2019, that salary will have to exceed $47,000 yearly and be lower than $107,432. THEN assuming it meets that criteria, we get to the duties tests.
What are my action steps. You should prepare a list of potentially affected employees and determine the cost/benefits of increasing their salary versus paying overtime. Don’t forget, even if you raise pay above the threshold, if their position does not meet the duties test, you have some risk.
If you have positions you believe meet the duties tests criteria, but have incumbents in those positions who do not meet (or no longer meet) the salary tests, you have to decide how to address this new threshold. You could increase weekly rates, institute a bonus/incentive payment plan, do both increase rate and institute a non-discretionary bonus, implement a variable hour salary structure or do nothing and pay overtime for hours worked overtime.
#AskCIP. Talk to CIP about your options. Penalties for misclassification of employees include recovery of back wages and/or an equal amount of liquidated damages. The DOL may also litigate and recommend criminal prosecution. Employers who willfully violate or repeatedly violate the wage laws (aka the Fair Labor Standards Act) may be assessed civil monetary penaltiesWe can help you comply with these new requirements. That may take the form of analyzing your workforce, updating job descriptions for accuracy and/or adjusting compensation. This is a shorter than usual window to prepare for compliance and if you have concerns, addressing this sooner than later will be key to ensuring the best way to address this compliance issue for your company.
Other Resources: Exemption for Executive, Administrative, Professional, Computer and Outside Sales (PDF)