A new federal overtime regulation is on the horizon that could make over a million more Americans eligible for overtime—which might mean a steep hike in costs for employers.
On March 7, 2019, the US Department of Labor (DOL) issued a Notice of Proposed Rulemaking regarding overtime pay. Specifically, the DOL plans to raise the salary level for employees who are counted as “exempt,” or unable to earn overtime pay.
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The proposal would take the salary threshold from $455 per week (as established in 2004) to $679 per week. That’s a new qualifying salary level of $35,308 per year. The proposed rule also calls for periodic reviews and updates to the salary threshold.
What’s the deal with overtime pay right now?
Employers currently need to comply with the Fair Labor Standards Act, which says that certain salaried employees—for example, managers and those with advanced knowledge “in a field of science or learning” such as medicine—are exempt from being able to earn overtime pay if they make:
- More than $455 per week; or
- Over $23,660 a year
An Obama-era rule change would have roughly doubled that level, requiring employers to pay overtime to salaried employees unless they make:
- More than $913 per week; or
- Over $47,476 a year
That raised cap would have made over 4 million more salaried workers eligible for overtime.
But the increase never went into effect. It was blocked in November 2016 by a federal judge in Texas, who ruled that the DOL had overstepped its authority by increasing the salary limit so dramatically and by basing the exemption exclusively on salary. Business groups cheered the ruling, saying the new regulations would have been expensive and eventually hurt workers by forcing cash-strapped employers to reduce their hours.
Since then, employers have been left in limbo over how to plan for possible changes to the overtime rules. The recently proposed increase would hit a middle ground between current rules and the larger expansion under President Obama.
And fortunately, as many business owners had already budgeted for a bump in their payroll costs under the Obama administration’s rule, it should be relatively easy to roll out an increase should the new proposal go into effect.
The federal case in Texas is on appeal in the 5th Circuit, but the case is on hold until the DOL comes to a decision on the salary threshold.
How should my business prepare?
First, know that an increase likely won’t take effect immediately. HR Dive reports that a new rule could be implemented in the latter half of 2019, but that timeline doesn’t account for further litigation.
Also remember that salary is not the only factor used to determine eligibility for overtime. In addition to requiring a fixed salary that exceeds the minimum threshold, there’s also a duties test. This test states that in order for a worker to be exempt from the overtime pay requirements, their duties must fall within one of the following categories:
- Executive—like project managers and VPs
- Administrative—like HR employees, marketers, and PR reps
- Professional—these can be “learned professionals” like lawyers, dentists, and accountants, or “creative professionals” like writers, musicians, and actors
- Computer employee—like software engineers or computer system analysts
- Outside sales—like enterprise salespeople
Pro tip: The key consideration of this test is the employee’s duties, not the employee’s title.
Keep in mind, the roles listed here are only potential examples intended to get you thinking and do not necessarily qualify an employee for an exemption. You should refer to this fact sheet from the Department of Labor and consult with a lawyer or advisor to determine whether a particular employee’s duties actually make them exempt.
But for some businesses, the new salary threshold will mean more team members who qualify for overtime in the near future. Here are a few ways you can prepare your business for the coming changes:
- First, review your team’s salary levels AND duties to make sure you are complying with the current federal rules. Do you have any employees who would be newly eligible under the recent proposal?
- If so, talk to your employees about their preferences to find an arrangement that works for both of you. You can consider:
- Rescheduling your employees so that they don’t incur overtime hours.
- Cutting costs elsewhere and budgeting for more overtime hours.
- Hiring more employees to spread the work around so that individual employees put in fewer overtime hours.
- Increasing the salaries of certain employees to exceed the new threshold—if they often work overtime, this may be a less expensive alternative.
- Finally, make your voice heard! The public can submit comments on the proposed overtime rule until May 21.
We’ll be keeping an eye out for the changes and will be back to explain what they might mean for you.