Early this year, the Department of Labor announced the minimum salary to be exempt from overtime pay will be $646 per week, or $35,568 per year. Any of your employees who earn less than that must be paid overtime if they work more than 40 hours in a week.
But those aren’t the only people who have to be paid overtime–those who don’t meet the “duties test” need to be paid overtime as well. (That part didn’t change.)
Why is the number so weird?
If you were pulling a number out of the air, you’d probably pick a rounded number–$35,000 a year or $650 per week. But this number is based on the 20th percentile of salaries, which is the same way the Department of Labor calculated the numbers the last time the limits were changed–in 2004. This is a safe way to pick the number, as the courts struck down an Obama era change that was much higher and not based on the same standard.
Is everyone earning this amount eligible to be salary exempt?
No. Salary is just one part of the rules to be eligible for exemption. Exemption means that you are exempt from the rules of the Fair Labor Standards Act (FLSA). You have to have a job that qualifies you. There are four categories that can allow you to be exempt if you also have a minimum salary. They are:
- Manager: ?If you manage two or more people and your duties are primarily managerial, then you can be salary exempt. If you have hire/fire power over the staff but spend most of your day doing the same work your staff does, you’re probably not eligible.
- Professional: Doctors, attorneys, and certified public accountants fall under this category. Also included are educated professionals who work independently and creative people (again, who work independently).
- Administrative Professionals: This refers to administrative functions like IT, finance, and HR, not administrative assistants (who are almost all non-exempt and eligible for overtime).
- Outside Sales: The “outside” part of this is really important. Two people selling the same product–one sitting in a call center and the other out meeting with clients–would have different exemption statuses. Outside sales people need to do the majority of their work outside of the office.
Does this affect your office?
If you haven’t done this already, you need to look at every employee who currently receives a salary exemption and is not eligible for overtime. Any of them who earn less than the minimum salary of $35,548 will be eligible for overtime on January 1. They need to start tracking all their hours, and if they work more than 40 hours in a week, they will receive overtime pay.
You’ll need to calculate an hourly rate. You can take the annual salary and divide by 2,080 (40 hours a week times 52 weeks a year) to come up with an hourly rate. If you do it this way, and the person works more than 40 hours in a week, their resulting paychecks will be larger than they were before the change. Overtime is 1.5 times a regular rate.
You can, instead, calculate a lower hourly rate to account for the overtime money the employee will receive.
Either one is legally fine (as long as the base hourly rate is equal to or higher than the minimum wage), but your employees may find the latter to be demoralizing. Proceed with caution.
If you have different policies for exempt versus non-exempt employees, your newly non-exempt employees may be unhappy. For instance, are exempt employees allowed to work from home while non-exempt employees are not? Do you require non-exempt employees to clock in no later than 8 a.m. while exempt employees can set their own hours? If you have big changes like this, make sure you address this with these employees.
These changes may not apply in your location
This is federal law, and while everyone has to comply, it’s a minimum. States are free to set their own limits. California, for instance, has a minimum salary exemption of “$49,920 effective January 1, 2020, for employers with 25 employees or less; $54,080 for employers with more than 25 employees.” If you are unsure of whether your state follows federal law or has a more generous state law, double check with your state department of labor or consult an employment attorney in your area. It’s important that you pay people fairly according to all laws.
January 1 is coming soon, so don’t be caught off guard. You may wish to implement the changes before January 1, as that day falls on a Wednesday, which is probably in the middle of a pay cycle. It will certainly be easier to have all affected employees be on one system for an entire pay period. Whatever you choose, make sure you’ve got everything ready for the changes.