In March, the U.S. Department of Labor proposed a new rule that would update the minimum salary threshold that largely determines whether or not an employee is exempt from overtime pay under federal law.
If enacted, the new rule would raise the salary threshold to $35,308 per year, or $679 per week, a substantial increase over the current level of $23,660 a year, or $455 per week. Though not as dramatic a jump as President Barack Obama's administration's failed attempt to institute a $47,000 salary threshold in 2014, the government's new proposal would impact many companies and their employees, making an estimated 1.2 million more workers eligible to receive overtime pay.
Though far from official, and potentially open to the same legal challenges that sunk the government's last effort to increase the salary level, the proposed overtime rule has a strong chance of being implemented as early as the third or fourth quarter of 2019. To prepare for the potential, employers should start thinking now about how they might classify their employees or raise wages in response to the regulations.
Companies should begin the auditing process now
It's important to remember that the $35,308 annual salary threshold is not the sole arbiter of exempt status classification.
To be exempt from overtime wages, employees must make more than the minimum and work in specifically-defined executive, administrative, professional, computer and outside sales roles. Now is a good time for employers to audit their pay practices to confirm that employees classified as exempt meet both the Fair Labor Standards Act's salary and duties tests.
Though an employee's annual salary is relatively straightforward, the duties test aspect complicates the matter, since it is easy for employers to misclassify workers who are paid more than the current salary threshold, but who nevertheless have job descriptions or day-to-day tasks that fail to pass a duties test. Though undertaking such a review can prove costly or time-consuming for the company, it is nothing compared to the expenses and headaches that a lawsuit could result in.
It is hard to say exactly which industries would be the most profoundly impacted by the proposed new rule, but a 2016 study of the Obama-era rule by the Department of Labor's Wage and Hour Division concluded that the education and health services, professional and business services, and financial activities sectors contained the most potentially affected workers.
Employers should cautiously consider wage increases
When the Obama administration's $47,000 salary threshold was initially set to go into effect, many employers chose to raise the base salaries of certain employees so that they would be exempt from overtime wages. After a federal judge in Texas invalidated the rule in 2017, HR departments were put into the uncomfortable position of either continuing to pay the unnecessarily higher salaries or risking a severe blow to morale by rolling back the wage increases.
A similar situation could develop with the new proposal, although the risk seems fairly reduced. Not only is the wage increase far more modest, affecting about 2.8 million fewer workers than the Obama-era rule, but it appears to be facing far less opposition from business interests and the Chamber of Commerce. When all is said and done, many employers will likely decide that raising salaries so that they exceed $35,308 is ultimately better for morale and less costly than dealing with the administrative burden of recordkeeping and calculations necessitated by overtime pay.
It should be noted, however, that the rule would allow employers to count "certain nondiscretionary bonuses and incentive payments" as up to 10 percent of an employee's salary. The regulation would also count payments that are made annually when determining an employee's yearly salary, while under the Obama administration's rule, the payments had to be made quarterly or more frequently in order to count towards the threshold.
When considering pay increases, employers should also take the opportunity to gauge whether their wages are competitive with other companies in the same field. Employers may also discover that what is standard for their local market may not be common to the industry at large. Some states and cities already have overtime thresholds that far exceed the federal requirement, such as New York City, which has a threshold of $58,500 per year for workers at companies with 11 or more employees, according to HR Dive.