By: Barry Dorans
This article will provide an overview of the changes proposed to go into effect on January 1, 2020, under the Fair Labor Standards Act (“FLSA”) concerning overtime and the minimum salary.
What is the current law? Certain employees are exempt from overtime and all other employees are required to be paid a base wage plus time and a half for any hours over 40 in a work week. For most exemptions, to qualify: (1) the employee’s primary duty must fit within a certain classification; and (2) the employee must be paid on a salary basis of a minimum amount, which is currently $455 per week ($23,660 per year) up until December 31, 2019. While there are some employees that are exempt from overtime, even if not paid on a salary basis, those exemptions are fairly rare.
What is the new standard? Effective January 1, 2020, while the primary duty test is unchanged, the floor for the salary base has been increased to $684 per week ($35,568 per year).
What are the employer’s options? (1) The employer can give raises to exempt employees so that they are paid at least $684 per week; (2) Determine if the employee qualifies for an exemption that does not require payment on a salary basis; or (3) Pay overtime for all hours over 40 in a work week. Note that employers are not required to convert the current salary basis to an hourly rate by dividing by 40. While the employer may not reset the hourly rate below the minimum wage, which is currently $7.25 per hour, they can determine what an equivalent hourly wage would be, considering the impact of overtime. For example, assume the employee was paid a salary of $550 per week and typically worked 50 hours. If the employee was converted to hourly and paid $11 per hour, if the employee worked 50 hours per week, their pay would increase to $605 per week ($440 for 40 hours of straight time at $11 per hour plus $165 for 10 hours of overtime at $16.50). If instead the employee was converted to an hourly employee at $10 per hour, and they worked the same 50 hours each week, they would be entitled to $550 ($400 for 40 hours of straight time at $10 per hour and $150 for the 10 hours of overtime at $15 per hour).
Potential problems. Any time an employer changes an employee’s rate of pay, it is bound to create problems. One potential problem is that even if the employer resets the hourly rate as mentioned above, there may be weeks when the employee makes less that they made before. Again, assuming an employee was being paid at a salary rate and then after the conversion was changed to $10 per hour, the employee would earn less than $550 for any week in which the employee worked less than 50 hours. On weeks in which the employee worked more overtime, the employee would make more than the previously salary. Depending on when the hours were worked, the employee runs the risk of making less over the course of the year. Even if the employee earns the same amount over the year as he/she did in 2019, the employee may still be upset if much of the overtime is paid during a few busier months and leaving the employee short during the months that the hours are less. Another problem is that there is a Federal law requiring that all employees be paid the same wage regardless of sex. If one employee is made exempt and another employee is not, that can be a violation of law if they perform substantially similar services.
Conclusion. These changes will likely require most employers to change how they treat many of their exempt employees, especially managers. Some of those employees may be recharacterized to fit within another exemption. For others, the employer may have to increase the salary to equal the new minimum or transition the employee to an hourly employee with overtime. The employer needs to carefully structure the pay policy so as not to violate overtime rules, yet not drastically increase payroll. We strongly recommend you consult with an attorney to make sure the employees are paid correctly. If employees are not paid correctly, the Department of Labor has the right to file suit on behalf of all employees to recover all unpaid overtime plus damages of an additional 100% of the amount owed. The owners are the company and any persons involved in paying the employees can be held personally liable. Additionally, private attorneys can sue and recover similar amounts for their client, plus attorneys’ fees.
Note that this is only a brief overview, please consult with an attorney to make sure you are in compliance with the FLSA and other Federal laws.