Organizations adjusted employee classifications in 2016 even though the anticipated changes never went into effect. With new regulations going into effect in January, now is a good time to revisit employee salary levels.
When 2020 begins, a long-awaited salary rule will finally be in effect and will need to be considered when deciding if a position is exempt or non-exempt under the U.S. Department of Labor’s Fair Labor Standards Act (FLSA). However, exempt or nonexempt status is not solely determined by salary, but considers other factors including duties and education.
The FLSA is the backbone of the wage payment system in the United States and was first implemented in 1938 to set standards and ensure that employees were being paid fairly for long workdays. Under the FLSA, overtime must be paid to non-exempt (hourly paid) employees when they work more than 40 hours per workweek.
Exempt and highly compensated employees
The minimum salary thresholds are regularly reviewed and adjusted to account for growth in employee earnings. The new salary rule adjusts the minimum salary for an exempt employee from $466 per week to $684 per week. The U.S. Department of Labor (DOL) considered input from public comment and held listening sessions during 2018 as part of the review process.
Under the FLSA, many employees are considered exempt from the requirement to pay overtime. The commonly used exemptions of administrative, professional and executive, and their respective “duties tests” are not changing on January 1.
The FLSA also includes a provision for total annual compensation for highly compensated employees, which will increase on January 1, 2020, from $100,000 to $107,432 per year. To qualify for this exemption, the employee must regularly perform at least one of the duties included in the executive, administrative, or professional exemption.
The new FLSA regulations also allows employers to use non-discretionary bonuses and incentive payments, including commissions, which are paid at least annually, to satisfy up to 10% of an employee’s standard salary when considering exempt status.
Correctly classify employees
To prepare for the changes, employers can take the following steps to help ensure that employees are correctly classified, so that required overtime payments are paid.
- Review pay rates and job description duties against the new rules using an exemption fact sheet from the U.S. Department of Labor, such as this fact sheet for the administrative exemption.
- Consider shifting positions from salary to hourly, and if modified, be sure to notify and document the change for each employee so they understand when, why, and how their pay structure will be altered.
- If you made adjustments in 2016, consider reclassifying employees to be exempt.
- Ensure that necessary time tracking systems are in place.
- Train any newly transitioned hourly employees on time tracking.
The recent of history of FLSA regulations
If this review sounds familiar it’s because back in 2016 many business, finance, and human resource professionals spent time analyzing salary versus hourly pay, and implementing new time tracking systems. Many salaried employees were reclassified to hourly at that time. Just a few days before the law was to take effect, a federal judge blocked the increases. This timeline outlines those events.
| 2004 | Minimum salary for exempt staff is set at $455 per week, $23,660 per year. |
|---|---|
| 2016 | President Obama doubles the minimum salary for exempt staff to $913 per week, $47,476 per year, to be effective December 1, 2016. |
| 2016 | Employers across the country review pay practices, improve time keeping processes, and many reclassify exempt employees (salaried) to non-exempt (hourly). |
| 2016 | On November 22, 2016, a federal judge stops the proposed thresholds of $913 per week, $47,476 per year, just days before the December 1, 2016, effective date. |
| 2017 | The proposed changes to minimum salary are invalidated, so the DOL continues to enforce the 2004 minimum salary. Many employers do not reclassify staff back to exempt (salary), and many are not aware that the 2016 rules never became law. |
| 2019 | On September 24, the DOL announced the new rules for January 1, 2020, and set the minimum salary at $684 per week, $35,568 per year. |
| 2020 | January 1, 2020, is the effective date for the new minimum salary levels, and for the salary of a “highly compensated employee.” |
U.S. territories such as Puerto Rico are excluded from the new rules, and will continue to follow the prior exemption levels of $455 per week, $23,660 per year. American Samoa will continue to have an exemption level of $380 per week, $19,760 per year. Most employers will not be impacted by changes to special salary levels for workers in the motion picture industry.
How we can help
CLA can help organizations understand this regulation and comply with it. No matter what industry, CLA has professionals experienced in the field who are ready to help. CLA’s human resources professionals stay on top of current regulations, legislation, and industry practices and can help you address a wide variety of human resources challenges. You should also consult experienced employment attorneys on this matter.