Effective January 2020, new overtime rules apply according to the Department of Labor. This will affect many employers, as millions of employees will now be eligible for overtime pay.
As of January 1, 2020, the Fair Labor Standards Act salary threshold increased from $23,660 per year to $35,568 per year. That is a difference from $455 to $684 per week. Additionally, the annual compensation for highly compensated employees increased from $100,000 annually to $107,432 under the new ruling.
When it comes to evaluating if someone is eligible for overtime, not only does salary come into play, but so does the “duties test,” which employers can find here. Use the duties test for each position to assist in determining their exemption status.
Next, look at all employees who are currently classified as exempt. If they earn at least the new threshold of $35,568, they can still be classified as exempt. For those that make less than $35,568, there are a few things you can consider.
First, you can keep employees’ pay rates the same and pay time-and-a-half for all hours worked over 40 during a workweek. Keep in mind that if overtime hours are part of an employee’s usual workweek, those hours will need to be considered when employees take leave in the case of the Family and Medical Leave Act. Often, contractors work until a project is completed, resulting in overtime hours.
If you would like to avoid paying overtime, you can also increase employee salaries. This would have to be done for all employees, not just those who were previously classified as exempt and no longer meet the exemption status. This may be a good option to explore when you are recruiting for open positions in your company. Raise the salary for the position at that time to avoid having to pay overtime for hours worked over 40 in a given workweek.
IMPACT ON COMPANIES
Most companies, especially those in the construction industry, have a mix of salaried employees, hourly workers and independent contractors. A lot of employers may now be inclined to look at how they can reduce hours to avoid paying overtime. We encourage you to prioritize your employees during this evaluation to ensure you do everything you can to prevent your talent from leaving. Start by weighing the options mentioned above for salary and hourly workers.
When changing employees’ exemption status, you may receive pushback. If you raise employees’ salary or hourly rate to make them exempt from the new rule, they may be appreciative of the pay increase yet still unhappy about not being eligible for overtime pay. In some cases, employees that previously received overtime but are no longer eligible may seek employment elsewhere in hope of getting overtime benefits again.
If you’re thinking about reclassifying employees as independent contractors so they cannot receive overtime, remember the nature of the work defines the relationship as outlined below:
- Worker supplies his or her own equipment, materials and tools. Necessary materials are not to be supplied by the employer
- Worker can be discharged at anytime
- Worker controls the hours of employment
- Work being performed is temporary or permanent
Regardless of the option you choose, it’s important to review all the positions within your company to ensure you are now paying employees based on their classification.
While we can’t predict how employees will react, companies can do their best to ease the transition when reclassifying employees. This can be done through open and frequent communication. Because reclassification can make employees feel less valued, having upfront and regular conversations throughout the process will help demonstrate that you appreciate each affected employee.
To avoid any misclassifications, it is recommended that you consult your legal counsel or utilize our Sikich Human Capital Management & Payroll Consulting team. We are experts on this matter and can assist you in evaluating the best option that makes the most sense for your business.