The Department of Labor announced a “final rule”, on September 24, 2019, which increases the amount of salary which an otherwise exempt employee must earn to remain exempt, effective January of 2020. Most employers are already aware of this change, but since it is effective January 1, 2020, we felt a “refresher PayDay” would be appropriate!
Who does this DOL rule affect?
Employees who are exempt from overtime based on their “duties” (the “duties test” to be exempt has not changed) and who currently earn a salary of less than $35,568 per year or $684 per week, will be impacted by this rule. The “salary-level test” for an exempt employee has required an annual salary of $23,660 since the year 2004, and this DOL “final rule” requires that employees who are exempt from overtime pay must earn a salary of at least $35,568 per year, or 50% more, effective January of 2020. The DOL estimates that there are currently about 1.3 million people classified as exempt who earn less than $35,568 per year in salary. Employers must identify who those employees are and make decisions as to increased pay or classification to non-exempt status to be effective the first of next year. Many employers will recall that the DOL proposed an increase in this “salary level test” to $47,476 just 3 years ago, but that rule was revoked and never implemented.
Other tests for exempt status
The “duties test” for “white-collar” exemptions for professional, executive and administrative employees does not change with this DOL rule change. Now would be a good time for employers to review the basis for classifying employees as exempt from OT or non-exempt.
Employer decisions to comply with this new salary rule
Employers need to identify who their exempt employees are that earn less than $35,568 per year (NOTE—a part-time exempt employee’s salary is not pro-rated for this rule—part-time exempt employees who earn less than $35,568 are treated the same as full-time exempt employees), and choose between the following 2 basic options for those employees:
Increase their salary to at least $35,568 for them to remain “exempt” from overtime pay; OR
Reclassify their status to “non-exempt” and track their hours for payment of overtime at 1 1/2X their hourly rate, effective January of 2020—this includes part-timers.
Employers should “do the math” and discuss which change is appropriate for each affected employee. Employers should also notify employees of these changes before year-end.
What if the change is in a pay period which includes January 1 as well as pre-2020 time worked?
An employer could pro-rate the salary between higher and lower based on days worked, but many will simply choose to begin payment of a higher salary with the pay period which includes Wednesday, January 1.
State laws
Many states follow federal law regarding exempt classifications and salary levels, BUT some states differ from federal law—-and generally, the most generous law trumps the other law. Employers should check with their individual state labor departments for possible differences in state law versus federal law as to who is exempt and required salary levels (California comes to mind here!).
Tracking of time
This is certainly not new, BUT employers must have an efficient “time/attendance” system in order to correctly track hours for employees. This is true for both hourly employees as well as salaried employees who are being treated as “exempt” and are close to the required minimum salary for exempt status of $35,568 per year, effective January of 2020.