This past September, the Department of Labor announced new laws for overtime pay. These laws take effect on January 1, 2020; so it’s definitely not too soon for your company to take a look at your employees’ salaries and make sure that you are ready for the change.
As you probably already know, the Department of Labor requires employees who make a certain salary to be paid at 1.5 their normal hourly rate any time they work more than 40 hours in a week. This most recent change has reset the minimum salary for exemption from overtime pay laws to $646 per week or $35,538 annually. If an employee makes less, you are legally required to pay at the 1.5 overtime rate if they work more than 40 hours in any given week.
This is the first change in the exemption minimum since 2004. In 2016, the Obama administration attempted to raise the minimum to $47,476, but this was struck down by the court. However, this most recent change is based on the 20th percentile of salaries, which is exactly how the Department of Labor made the calculation in 2004. Because the Department of Labor used the same method to calculate the new minimum, it is unlikely to face an opposition from the court.
The Department of Labor estimates that 1.2 million employees will become eligible for overtime pay under the rule change. Most likely to be affected are workers who put in a lot of hours for a low salary, such as managers of shops and restaurants, people who work for nonprofit organizations or political campaigns, and even some part time workers.
Suzanne Lucas at Evil HR Lady breaks down the details of the eligibility requirements, and provides great tips for businesses to make sure they are ready to comply with the new rule change as of January 1.
She recommends reviewing every employee who currently isn’t eligible for overtime to figure out whether or not they will become eligible under the new law. If a newly eligible employee is paid a salary rather than an hourly wage, you will need to divide their annual salary by 2080 (that’s 40 hours per week for 52 weeks in the year) or divide their weekly paycheck by 40 to discern the hourly rate. The employee will need to start tracking their weekly hours, and if they work more than 40, you will be required to pay them at a 1.5 rate. If the employee rarely works extra hours, their paycheck won’t change much; but if they do, you’ll end up paying them more each week than you did before.
If you know your employees work a lot of extra hours, you do, legally, have the option of lowering their hourly wages (as long as it’s above minimum wage) so that the combined overtime pay adds up to a comparable annual salary. However, this will mean your employees will take home smaller checks than before, which Lucas warns could be quite “demoralizing.” After all, the point of the rule change is to make sure that more employees get fairly compensated for all hard work they do above and beyond the minimum.
Lucas also points out that these are changes in the federal law, which sets a nationwide minimum. However, some states, such as California, already have a higher salary rate for exemption; if this is the case in your state, your payroll may not be affected. She also helpfully notes that since January 1 falls on a Wednesday, which is likely mid-pay cycle, it might be less confusing if you implement any changes in wages the week before.