Overtime can be a significant overhead expense to employers, cutting deeply into the company’s bottom line. It is, therefore, important for employers to understand which employees must be paid overtime and which do not. Recently, the Department of Labor made a significant change to overtime rules that could dramatically affect employers. The change goes into effect on Jan. 1, and it is important for employers to be prepared. To understand the effect of this change, it is important to understand some basic principles of overtime law.
The Fair Labor Standards Act (FLSA) mandates which employees must be paid overtime and how much. The FLSA classifies employees as either “exempt” or “nonexempt.” Nonexempt employees get overtime pay. Exempt employees do not. There are many exemptions that have been passed over the years.
With few exceptions, an employee must meet all three of the following tests to be exempt from overtime pay:
- be paid on a salary basis,
- perform certain exempt job duties, and
- be paid over a certain minimum amount of money per year.
Many employers mistakenly believe that by simply putting an employee on salary (meeting the first test), and not paying them an hourly wage, the employee is automatically exempt, and no overtime must be paid. This is incorrect, and can lead to significant liability for violating the FLSA. Remember, in most circumstances, if the employee does not meet all three overtime tests, he or she is nonexempt and must be paid overtime.
The second test is dependent not on the title of the employee, but on the actual job duties that they perform. Exemptions typically are limited to employees who perform relatively high-level work. Typical categories of exempt job duties include bona fide “executive,” “professional” and “administrative” duties.
An “executive” is exempt if they regularly supervise two or more other employees; and their primary duty is management; and they have genuine input into the job status of other employees (hiring, promotions, firing).
A “professional” is exempt if they are part of the “learned professions” (lawyers, doctors, teachers, registered nurses, accountants) — meaning their work is predominantly intellectual, requires specialized training and involves the exercise of discretion and judgment.
An “administrative” position is exempt if the employee’s duties are office or nonmanual work that is directly related to management or general business operations and involves them exercising independent judgment and discretion about matters of significance (human resources employees, payroll, accounting, public relations, etc.).
Finally, the third test involves minimum threshold salary limits. If the employee is paid less than the threshold limits, then they must be paid overtime, regardless of whether they meet the first two overtime tests. Currently, the threshold is $23,600 annually, or $455 per week. Effective Jan. 1, 2020, however, the DOL has raised the threshold salary limits to $648 per week, or $35,568 annually. This new rule change was in response to a federal court striking down a 2016 rule change that would have increased the limit to $913 per week, or $47,476 per year.
So what does all of this mean? With the proverbial salary net being significantly widened by the DOL, it is projected that approximately 1.3 million new employees will now qualify for overtime pay who previously did not — all due to the new rule change. Therefore, employers should immediately audit the weekly and yearly wage amounts of all salaried employees.
If an employee already makes $35,568 a year or $648 per week or more, and meets the other two overtime tests set forth above (or is otherwise exempt under a different exemption), then nothing needs to be done. They are not entitled to overtime.
However, if they make less than these amounts, you will need to start keeping their hours and diligently ensure they get paid time-and-a-half overtime wages (or don’t have them work over 40 hours per workweek). FYI: Because each employer is required to keep certain records for nonexempt workers, if they fail to do so, the employee’s calculation of overtime hours worked is presumed to be correct.
The 2016 rule changes were challenged, so it is likely the current rule change will be challenged as well. However, until the rule is struck down, an employer should be prepared to comply with it.
Because overtime laws can be complicated, this article is not intended to be exhaustive. You should contact qualified counsel regarding any question you might have and for more information.