Overtime Rule Changing This Year

By: Bob Goldberg, RSPA General Counsel

One of the most frequent questions to the RSPA Legal Hotline regards the rules for the payment of overtime compensation. Typically, the question involves administrative staff and technicians. Common misconceptions are that the individual is paid a salary rather than hourly and, thus, exempt, an individual is a supervisor or manager when actually they are not, or the company provides comp time for the extra hours worked. As of January 1, 2020,  employers will be subject to a new US Department of Labor (DOL) rule implementing critical changes to the earning thresholds under the Fair Labor Standards Act (FLSA).

Most notably, the new rule raises the minimum salary an employee must be paid to be exempt from overtime under the FLSA, from $23,660 ($455 per week) to $35,568 per year ($684 per week). Generally speaking, employees are exempt from the FLSA’s overtime requirements if they (1) are compensated at or above the standard salary level and (2) are a white-collar employee who works in an executive, administrative, or professional capacity, as those terms are defined in the FLSA (“duties test”). While the new rule enacts a significant change to the salary basis test by increasing the standard salary level to $684 per week, it enacts no changes to the duties test, leaving intact the requirement that the employee also work in a qualified executive, administrative, or professional capacity.

In addition to raising the standard salary level to $684 per week, the new rule contains other important changes intended to reflect evolving pay practices in the US labor force:

  • Highly compensated employees (HCEs). The new rule increases the total annual compensation an employee must earn in order to be exempt as a “highly compensated employee” (HCE) from $100,000 to $107,432 per year. According to the DOL, the $107,432 figure equals the 80th percentile of weekly earnings of all full-time salaried workers nationally. The HCE exemption applies to white-collar employees who perform office or non-manual work, and customarily perform one or more of the duties required of an exempt executive, administrative, or professional employee, and who earn the new annual salary threshold.
  • Non-discretionary bonuses and incentive payments. The new rule permits employers to use non-discretionary bonuses, commissions, and other incentive payments to satisfy up to 10 percent of an employee’s standard salary level for purposes of determining the employee’s total annual compensation in a given year. According to the DOL, the types of bonuses covered by the new rule include non-discretionary bonuses tied to productivity or profitability, such as bonuses based on a specified percentage of the employer’s profits from the prior year. To be properly “countable” under the new rule, non-discretionary bonuses and incentive payments must be made on an annual or more frequent basis. The new rule also affords employers one pay period in which to make a “catch-up” payment in the event the employee does not earn enough in non-discretionary bonuses or incentive payments in a given year (52-week period).

The DOL estimates that approximately 1.3 million US workers will become newly entitled to overtime by virtue of the new rule, and that approximately 101,800 workers will be affected by the increase in the HCE annual compensation level to $107,432 per year. The DOL also estimates that US employees will earn approximately $298.8 million in extra pay by virtue of the new rule’s changes to the FLSA’s salary levels. With the new rules, it may be time to review your overtime policy. Here is a template to consider:

When operating requirements or other needs cannot be met during regular working hours, employees may be required to work overtime. All overtime work must receive the supervisor’s prior authorization. Overtime assignments will be distributed as equitably as practical to all employees qualified to perform the required work. Important! Your supervisor must approve all overtime in advance. Because unauthorized overtime is against company policy, employees who work unauthorized overtime are subject to discipline, possibly including termination. Overtime compensation is paid to all non-exempt employees at the following rate(s) and in accordance with federal and state laws:

  • Overtime is calculated at a rate of one and one-half times a Non-Exempt employee’s regular rate for all hours worked over forty (40) hours in one week. (This may vary by State).

As required by law, overtime pay is based on actual hours worked. Time off, paid leave or any leave of absence will not be considered hours worked for purposes of performing overtime calculations. Exempt employees may have to work hours beyond their normal schedule due to work demands. No overtime compensation will be paid to exempt employees.

Of course, if you have any questions, the RSPA Legal Hotline is available to members.