As an employer, understanding and obliging by the rules of overtime can be confusing. And at the start of 2020, the handbook became a little bit more complicated. As of January 2020, the Department of Labor’s new overtime rule went into effect, making roughly 1.3 million employees newly eligible for overtime pay.1 We’ll go into further detail about how the overtime rule may impact your business and if there are changes your company might need to make in order to remain compliant.
What Is the New Overtime Rule?
Beginning January 1, 2020, the Fair Labor Standards Act (FLSA) salary threshold increased to $35,568 annually, or $684 weekly. The salary threshold for exemption was previously $23,660 per year or $455 per week before the recent overtime rule update.2
This new threshold means potential changes for your employees, including the possibility of making previously exempt employees newly exempt. As a business owner, you’re likely aware that exempt employees are ineligible for overtime. The new rule and increase in employees becoming non-exempt means that more employees will now be eligible for overtime pay.
An employee is considered exempt if they:
- Are paid on a salary basis
- Earn at least the FLSA salary threshold ($35,568 per year starting in 2020)
- Have executive, administrative or professional job duties3
The DOL’s new overtime rule also changes the annual compensation requirement for highly compensated employees to $107,432 per year (previously $100,000).1 Rules for highly compensated employees were originally implemented to prevent discrimination between high- and low-wage workers. Based on the highly compensated employee rules, those who fall into this group won’t face an unfair advantage in relation to retirement plans and miscellaneous benefits.
Under the FLSA, a worker may be considered a highly compensated employee if they:
- Earn $107,432 or more per year (previously $100,000 or more per year)
- Perform office or non-manual work
- Regularly perform at least one of the duties of an exempt executive, administrative or professional employee4
How to Prepare Your Business for the New Overtime Rule
There are a few housekeeping rules you may need to make sure you’ve taken care of so your employees remain in good standing.
#1: Check Exempt Employees’ Salaries
Double-check that your exempt employees earn at least $35,568 per year. If that’s the case, you’re ready for business. When it comes to exempt employees earning less than that amount, you have the option to increase their salary, limit their overtime or pay overtime wages. If you choose to increase the salaries of any employees you should consider pay raises for both exempt and nonexempt employees. This will close the wage gap, avoid wage violations and maintain morale across the board.
If any newly nonexempt employees make less than $35,568 annually, they must be paid overtime wages for overtime work. Overtime is considered 1.5 times the employee’s regular rate of pay for any hours worked over 40 during a workweek.5 It’s a great idea to brush up on how to calculate overtime if you plan on paying newly nonexempt workers.
You also have the option to limit the number of overtime hours newly nonexempt employees can work. This may rustle a few feathers, so it’s important that if you choose this option to do so, communicate with your employees as soon as possible.
#2: Discuss Changes With Employees
If you have any employees that are newly nonexempt due to this overtime rule, you must be open and communicate with them. You’ll want to go over job changes, offer timekeeping training and maintain a positive attitude.
Job changes you’ll want to discuss with your nonexempt employees may include flexibility, task redistribution, overtime procedures and policies. Newly nonexempt workers will also need to track their time work. Providing a training session about your timekeeping processes can be helpful to you and your employees in the long run.
When discussing the new overtime changes, positivity is key. Informing your employees that nonexempt status is not a reflection of their performance may help ease the transition. In addition, you may want to be open with them about how the new rule is mandatory, and they now have the potential to earn extra income from overtime hours. The more you positively promote any changes in the workplace, the less likely your employees will see them as inconvenient or unwarranted.
#3: Changes Should be Implemented as of January 2020
If you haven’t already implemented any changes to your employees and payroll, it’s important to do so immediately. To get started, make sure you:
- Take note of which employees are impacted by the new law
- Notify employees of applicable changes
- Update your payroll to reflect changes immediately
As with any important financial decisions, if you have any questions related to this new rule, contact your advisor to gain more insight and information about how you and your employees may be affected.
This content is developed from sources believed to be providing accurate information, and provided by Mission:Advice℠ in Shepherdstown, West Virginia. Mission:Advice℠ is the world's first financial planning practice to integrate & synchronize in time, space, and purpose, military planning processes with financial planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.