On January 1, 2020, the final overtime rule became law—making over 1.3 million more Americans eligible for overtime pay. For business owners, the new overtime law might also mean a hike in costs, depending on the types of workers you employ.
On September 24, 2019, the US Department of Labor (DOL) finalized its new overtime rule, which is fairly similar to the proposed rule that came out in March. Specifically, the DOL raised the salary level for employees who are counted as “exempt,” or unable to earn overtime pay.
The new overtime rule takes the salary threshold from $455 per week (as established in 2004) to $684 per week. That’s a new qualifying salary level of $35,568 per year. The new law went into effect on January 1, 2020.
The final rule also says that up to 10% of the salary minimum can be made up with commissions, bonuses, and other incentives that are paid out at least annually.
What’s the deal with overtime pay?
Employers need to comply with the Fair Labor Standards Act (FLSA), 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 above specific salary thresholds.
Starting January 1, 2020, those thresholds are:
- More than $684 per week; or
- Over $35,568 a year
A separate rule proposed during the Obama-era would have roughly doubled the previous 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 decision, saying the new regulations would have been expensive and eventually hurt workers by forcing cash-strapped employers to reduce their hours.
Since then, employers were in limbo over how to plan for possible changes to the overtime rules… until earlier this year. On March 7, 2019, the DOL issued a Notice of Proposed Rulemaking stating their intention to raise the salary threshold, and the finalized overtime rule hits a middle ground between previous levels and the larger expansion under President Obama.
Fortunately, as many business owners had already budgeted for a bump in their payroll costs under the Obama administration’s rule and the proposed rule back in March, it should be relatively easy to roll out an increase now that the new overtime rule is in effect.
What should my business do now that the final overtime rule is here?
First, know that the increase took place on January 1, 2020.
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 means more employees now qualify for overtime pay.
Here are a few ways you can prepare your business for the recent changes:
- First, review your team’s salary levels AND duties to make sure you’re complying with the current federal rules. Do you have any employees who are newly eligible under the final overtime rule?
- 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.
We’ll be keeping an eye out for any additional overtime updates and will be back to explain what they might mean for you.
