Preparing for the New Overtime Exemption Salary Threshold

Labor & Employment Newsletter

Client Alert

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Earlier this month, the Department of Labor issued a new proposed rule that, if it takes effect, will raise the pay threshold for overtime exemption from an annual salary of $23,660 (or $455 weekly) to $35,308 (or $679 weekly). The Department of Labor anticipates that this will make more than one million currently exempt workers eligible for overtime. Now, the public has 60 days to comment on the proposed rule before the Department of Labor sends a final version to the White House for executive approval. 

The salary threshold has been in flux over the last several years, beginning in 2016 with the Obama administration’s proposal to increase the overtime salary threshold to $47,476. This administration’s new proposed rule falls midway between the current threshold and that proposed by the former administration. (A series of lawsuits challenged the Obama proposal, and it never took effect.) 

While there is not a firm date that the new salary threshold will take effect, it is more likely than not that President Trump will approve the proposed rule and sign it into law shortly after the 60-day comment period expires in mid-May. Employers should take inventory of their workforce and start preparing now. 

What Should Employers Do?

If an employee is currently a salaried exempt professional, administrative or executive employee earning between $455 and $679 weekly, after the new rule takes effect, that employee will lose his exempt status and must be paid overtime for all hours worked over 40 in a workweek. There is an exception for lawyers, doctors and teachers, who do not have to meet a minimum salary requirement to qualify under the professional exemption. This change to the minimum salary requirement is expected to increase employer overtime costs, particularly in certain industries, such as food service, hospitality and retail.

Initially, employers should take inventory of their workforce and gauge how the new rule will affect individual jobs and overall labor costs. Employers should consider whether there are changes to the compensation structure or other strategies that might alleviate the impact of the new rule. Some of the possible options are:

  • For exempt employees currently making a salary of less than $679 per week, employers can consider raising their weekly salaries to at least $679 so they remain exempt. As a practical matter, this may work only for those employees who are already reasonably close to the new $679 minimum. Employers can alleviate the impact of an employee’s salary increase by reducing other components of the employee’s compensation, such as a year-end bonus. Also, if an employee receives a higher salary to maintain the exemption, there is nothing to prevent the employer from requiring additional work. Before doing this, an employer should check to be sure that the employee’s duties clearly meet the exemption.
  • Keep the employee’s salary constant, but make it clear that the salary is based on an expectation that the employee will work a specific number of hours each week. By setting the employee’s expected hours higher, you can effectively lower the regular hourly rate that’s used to compute the employee’s overtime pay. Remember, though, that since the employee is no longer exempt, the employer must track hours and pay one and a half times the regular rate for all hours worked over 40 in a workweek. With this approach, the employee must record all the hours worked each week.
  • Reduce the employee’s salary to keep the employee’s total compensation level. With a good estimate of the overtime an employee will work, the employer can set the new pay rate for that employee, factoring in that overtime, so that the employee’s overall pay will remain relatively unchanged. However, before going down this path, the employer should consider what impact this reduced salary could have on employee morale and workplace turnover. Again, the employee must record all hours worked.
  • Manage non-exempt employees’ overtime carefully. The new rule will have no effect on labor costs if employees do not work over 40 hours in a week. Require all non-exempt employees to record all hours worked and seek advance approval to work overtime. Use the disciplinary process to ensure compliance with your overtime policies.
  • Look at other workplace modifications that might reduce overtime costs. Are there positions that could be restructured in a way that reduces the need for overtime work? For instance, are there situations where two part-time employees will suffice instead of one full-time employee to avoid unnecessary overtime?
  • Consider alternative methods of compensating employees. Some employers may benefit from paying their employees on a fluctuating workweek basis. Under this method of payment, the non-exempt employee receives a guaranteed base salary each week regardless of the hours worked and must still be paid overtime for all hours worked over 40. However, because of the way overtime is calculated under this method, the total amount of overtime compensation is often reduced. Other compensation schemes, such as paying employees on a day-rate basis, might be advantageous in some situations.

Employers should keep in mind that the new rule will likely result in some cultural changes in the workplace that may need to be managed. Previously exempt employees who lose their exempt status will have to start recording time. As a result, employers may need to change procedures, implement automated systems, conduct training, and give employees a chance to adjust.

The new rule is also an opportunity to review job classifications and make any changes that may be needed or overdue. The new rule does not make any changes to the duties test for the executive, administrative or professional exemptions. However, for employers with employees who have been misclassified as exempt under that test, this is an ideal time to resolve any outstanding issues.  

As always, if there is any question of Fair Labor Standards Act compliance, save time and money by seeking advice from counsel on the front end to address it.