After more than four years in the draft proposal stage and federal lawsuits, Congress recently enacted new overtime rules for white-collar workers. Under the law, more than 1.3 million American workers are now eligible for overtime of one-and-a-half times their regular pay rate for any hours worked above 40 in a single week. It’s the most significant update to required pay rates under the Fair Labor Standards Act (FLSA) in more than 50 years and thousands of employers will need to make changes to bring employees’ pay rates under compliance.
In this article, we examine:
- The new overtime rules and salary thresholds;
- Claiming an overtime exemption;
- Industries affected;
- Key compliance considerations; and
- Selected FAQs.
Details of the New Overtime Rules
The final Department of Labor (DOL) rule was published on September 24, 2019, and went into effect on January 1, 2020. New earnings thresholds for exempt executive, administrative, and professional employees are:
- $684 per week for the standard salary level, which is equivalent to $35,568 per year
- $107,432 for the total annual compensation requirement for “highly compensated employees”
- $1,043 per week for the motion picture industry (amount can be prorated)
- $455 per week for Puerto Rico, U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands
- $380 per week for American Samoa
In addition, nondiscretionary bonuses, commissions, and incentive-based pay can be used for up to 10 percent of the standard salary level. In these instances, bonuses must be made at least annually.
Employees age 16 or older who work in excess of 40 hours per week are eligible for new federal overtime rules unless they are specifically exempted. The new salary thresholds are considerably less than what was proposed in the 2016 Obama-era overtime pay proposals. That law would have applied to more than four million American workers, whereas the recently enacted overtime rule and its lowered salary thresholds capture about three million fewer workers.
Claiming an Overtime Exemption
Under certain circumstances, employers can exempt certain employees from minimum wage and overtime rules, as long as specific criteria are met. Section 13(a)(1) of the FLSA governs these exemptions, and Section 13(a)(1) and Section 13(a)(17) govern exemptions for certain computer-related jobs.
To claim an exemption, employers must meet each of these three criteria:
- The employee must be paid a regular, fixed salary that does not change due to changes in quality or quantity of work.
- Note: A regular hourly rate of at least $27.63 can be substituted for computer employees.
- The employee must be paid at least the minimum salary threshold (see above).
- Exceptions: This rule does not apply to outside sales, teachers, or professionals practicing law, medicine, accounting, engineering, architecture, or other “learned” occupations.
- “Creative” occupations such as music, writing, acting, graphic arts, or a job requiring invention and imagination can be exempt.
- The employee’s job duties must be associated with exempt executive, administrative, professional, outside sales, or computer employees.
- Note: A more relaxed job duties test can apply to highly compensated employees (HCEs). HCEs are permitted catch-up contributions within one month of the end of the year to meet the $107,432 threshold.
Bear in mind that job titles and a certain minimum salary do not by themselves qualify for an exemption.
There are some industries affected by the overtime rules more than others. Employers in these fields should closely evaluate how employees are classified, paid, and review job descriptions to ensure everyone complies with the new DOL overtime rules.
Most construction businesses will be affected by the overtime rules, even though hourly construction workers in non-management positions probably won’t notice much of a difference (mainly because overtime protection is still in place for these occupations). White-collar construction workers, especially those that work across multiple jobsites, may see a bump in overall pay as a result of the new rules. Positions that may be most affected include project managers, bookkeepers and other finance roles, human resources, and administrative assistants.
There is no standard exemption for not-for-profit institutions. If the organization has at least two employees and $500,000 in gross revenues annually, employees may be eligible for overtime. Income from charitable activities, such as donations, contributions, membership dues, in-kind donations, and proceeds from fundraising events do not count toward the $500,000 revenue threshold, so it may be possible to avoid DOL rules. It is important to note that certain entities are covered under the new rules regardless of revenue. These include schools, hospitals, mental health centers, and medical care and/or nursing facilities.
Volunteers, interns, Americorps and VISTA workers, and independent contractors do not apply to the new DOL overtime rules. It is imperative to ensure that these people are classified properly and not performing duties above and beyond their job descriptions.
Hotels employ 1 in 25 Americans and 10 percent of Americans work at restaurants, and most workers are paid hourly. Thus, many hospitality workers may find themselves covered under new overtime rules. Positions such as restaurant managers or assistant managers, hotel department managers or assistant managers, and other administrative employees like payroll and human resources will be affected the most.
Other industries, including manufacturing and retail, will also be heavily impacted by the new law.
How Employers Can Comply with New Overtime Rules
Employers that now have non-exempt employees eligible for overtime pay have a few options. The most straightforward among these include:
- Raising salaries
- Reclassifying jobs from hourly to salary, and meeting minimum salary thresholds
- Changing work schedules and assignments so that employees are less likely to accrue overtime
Because some employees’ work schedules aren’t fixed, employers may find it difficult to determine how to bring an employee’s salary into compliance with the new overtime rules. There are two possible solutions besides the straightforward method of paying overtime as it earned. These are:
- Bonuses or other incentive-based pay
- Perks and other benefits
Under the new rule, certain perks, bonuses, and incentives do not have to be included in an employee’s regular pay rate. As one method of bringing pay rates into compliance, employers could elect to include some of these items into an employee’s regular rate. Alternatively, employers that find themselves changing employees’ pay rates in such a way that might negatively impact the employee, these perks and benefits can be incorporated into overall compensation.
- Sign-on bonuses and discretionary bonuses
- Compensation for unused paid leave
- Certain reimbursed expenses, like for work cell phones, continuing education exam fees, and travel
Other perks like wellness programs, gym or fitness memberships, employee discounts, tuition assistance, and adoption assistance also do not have to be included in regular pay rates.
Other positions with a fluctuating workweek and varying hours can be difficult to bring into overtime compliance. In these scenarios, employers can use bonuses or other payments as part of the overall pay rate. Under the rule, bonuses that are paid on top of a fixed salary are compatible with a fluctuating workweek method of compensation. Employers in construction and other fields that cannot guarantee a regular schedule for some employees should find this addition to the overtime rule helpful.
Can I average an employee’s overtime throughout the entire two-week pay period? No. Overtime pay is calculated in the week it is accrued.
What should I be using as the workweek? The definition of a workweek can vary from employee to employee but must be seven consecutive days. Therefore, the workweek can start on any day of the week and at any hour of the day.
Is there an exemption for small businesses? No; however, the FLSA covers employees of businesses that have annual gross sales of $500,000 or more, as well as individual employees who are employed in hospitals, medical or nursing care facilities, schools (for-profit and non-profit), and public agencies.
If my local jurisdiction has different laws for overtime, which ones should I follow? The DOL and FLSA represent the minimum requirements for regular and overtime pay; if the local jurisdiction mandates higher standards, then you should follow those rules.
How does the DOL treat weekends and holidays? The new overtime rules do not apply to Saturdays, Sundays, holidays, or other regular days of rest. Overtime is calculated based on the total number of hours worked in a week, regardless of which day(s) the excess time falls on.
What if I reach a separate agreement with my employees about overtime pay? Agreements made between an employer and employee, such that a lump sum payment be made in lieu of calculated overtime, or that no hours above 40 will be permitted, are invalid.
Employers who have newly non-exempt employees should assess the changes they need to make and communicate these with affected employees if they haven’t done so already. Employers not already working with timekeeping solutions will want to evaluate service providers and provide employee training as necessary.
Additional guidance on the new overtime rules can be found at www.dol.gov/whd. The professionals at PBMares are also able to assist in determining if employees meet the new overtime rules or qualify for exemptions and provide guidance on implementing compensation programs to meet DOL compliance requirements.
For questions about how the new overtime rules apply to specific industries, contact Jennifer French, Partner and Construction Team and Real Estate Team Leader, Bo Garner, Partner and Not-for-Profit Team Leader, or R. Todd Swisher, Partner and Hospitality Team Leader.