Effective January 1, 2020, the overtime (OT) exemption salary threshold was increased by the U.S. Department of Labor from $455 per week ($23,000 per year) to $684 per week ($35,568 per year); this is a fairly significant increase every employer should be aware of.
This means that all employees who are currently classified as exempt from overtime but who are receiving less than $684 pay per week, must now either be reclassified as non-exempt and receive overtime pay for all hours worked over 40 in one week or receive a salary pay increase to get them above the threshold.
To help employers determine what to do, we suggest that you immediately:
- identify the affected positions;
- determine the number of hours worked by those employees; and
- conduct a cost analysis of reclassifying the employees as non-exempt and paying overtime versus the cost of increasing salaries above the new threshold.
When determining an employee’s salary for OT threshold purposes, the Fair Labor Standard Act (“FLSA”) allows employers to also consider nondiscretionary bonuses and incentive payments (including commissions), if paid at least on an annual basis, to make up 10% of the salary threshold. For example, if an employee’s minimum base salary is $615.60 a week the additional $68.40 could be made up with the nondiscretionary bonuses and/or incentive payments.
Employers choosing to reclassify affected employees as non-exempt rather than raising salaries should consider that many of these employees have not been hourly employees before and should be trained on proper timekeeping practices to ensure weekly hours and overtime are being tracked properly.
Employers should also be aware that salary is just one of the determining factors considered in establishing whether an employee is exempt from overtime. Under the FLSA, an employee must both be above the salary threshold and perform duties/meet requirements which fall into one of the following categories for overtime exemption:
1. EXECUTIVE (examples: chief executive officer, controller, vice president, director)
- Primary duty consists of managing the enterprise or a customarily recognized department or subdivision of the enterprise.
- Customarily and regularly directs the work of two or more full-time employees or their equivalents (for example, one full-time employee and two half-time employees).
- Has the authority to hire or fire other employees or makes recommendations that carry weight as to the hiring, firing, advancement, promotion or any other change in the status of other employees.
2. ADMINISTRATIVE (examples: manager, supervisor, administrator)
- Primary duty consists of performing office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers.
- Work includes the exercise of discretion and independent judgment with respect to matters of significance.
3. PROFESSIONAL: LEARNED AND CREATIVE (examples: accountant, nurse, engineer, composer, singer, graphic designer)
- Learned Professional
- Primary duty consists of the performance of work that requires advanced knowledge (beyond high school) and that is predominantly intellectual in character and consistently includes the exercise of discretion and independent judgment.
- The advanced knowledge is in a field of science or learning and was acquired by a prolonged course of specialized intellectual instruction. (This knowledge may be demonstrated either by possessing the appropriate academic degree or by having substantially the same knowledge level and performing substantially the same work as degreed employees but possessing advanced knowledge only through a combination of work experience and intellectual instruction.)
- Creative Professional
- Primary duty consists of the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work.
4. COMPUTER-RELATED (examples: network or database analyst, developer, programmer, software engineer)
- Is paid at least $684 weekly (effective Jan. 1, 2020) or $27.63 per hour. That is, this exemption does not have to meet the salary basis requirement to regularly receive a predetermined amount of pay constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed if paid at least $27.63 on an hourly basis.
- Primary duty consists of the application of system-analyst techniques and procedures, including consulting with users to determine hardware, software or systems functional specifications, or the design, development, documentation, analysis, creation, testing or modification of computer systems or programs, or the design, documentation, testing, creation or modification of computer programs related to machine-operating systems, or a combination of these duties which requires the same level of skills.
5. OUTSIDE SALES (examples: salespeople, contract negotiators)
- The salary basis and salary requirements do not apply for this exemption.
- Primary duty consists of making sales or obtaining orders for contracts for services or for the use of facilities for which consideration will be paid by the client or customer.
- Customarily and regularly is engaged away from the employer’s place or places of business (including an employee’s home office)
6. HIGHLY COMPENSATED EMPLOYEES PERFORMING EXECUTIVE, PROFESSIONAL OR ADMINISTRATIVE DUTIES
- These employees are paid an annual total compensation of $107,432 or more, which includes at least $684 per week paid on a salary basis (effective Jan. 1, 2020). The required total annual compensation of $107,432 or more may consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period, but does not include credit for board or lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits.
- Primary duty consists of performing non-manual office work. Note: No matter how highly paid, manual workers or other blue-collar workers, including non-management construction workers, who perform work involving repetitive operations with their hands, physical skill and energy are not eligible for this exemption.
- Customarily and regularly performs at least one of the exempt duties or responsibilities of the executive, professional or administrative exemption.
Employers who are tracking and paying overtime for employees who receive varying pay rates should also take great care when determining the proper rate of pay for overtime, as overtime must be paid at one and a half times the regular rate for all hours worked over forty hours in a given week. One common mistake is that employers inadvertently calculate and use an incorrect regular rate of pay, which can lead to violation of the FLSA, back wages, liquidated damages and attorneys’ fees.
When considering whether your pay practices are in line with federal and state wage and hour laws, the old adage applies: “an ounce of prevention is worth a pound of cure.”
ABOUT NEIL MORRIS
Neil A. Morris is Chair of the firm’s Philadelphia Labor and Employment Group. He has passionately represented employers for the last 30 years. He concentrates in the areas of labor and employment, municipal labor law, employment discrimination, defamation defense, commercial litigation, and business litigation. He has served as Special/Labor Counsel for more than 35 Pennsylvania Townships and Boroughs, the County of Bucks and many private employers. He is often brought into municipalities to handle “crisis” situations involving employees and/or management.
ABOUT GABRIEL CELII
firstname.lastname@example.org | 267.338.1361
Gabriel Celii is a Labor & Employment attorney who is also a part of the newly formed Employee Mobility practice at Offit Kurman. Gabe devotes his practice to representing businesses and municipal entities navigating labor and employment disputes ranging from wage and hour litigation and workplace discrimination defense to labor negotiations and the resolution of grievances. During his representation of Philadelphia-area Townships and Counties, he has successfully defended claims brought against public officials and advised municipalities on the drafting of local ordinances, such as Police Pension DROP amendments.
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