What HR professionals and small business owners need to know about the federal FLSA overtime rule, and what to do if your state has its own requirements
You’ve probably heard about the new federal overtime rule — mandating that employers raise the salary threshold for “white-collar” employees who are exempt from the Fair Labor Standards Act’s overtime provisions. This requirement alone is complex.
The complexity factor intensifies if your small business operates in a state jurisdiction that has its own overtime exemption rules. Now, you must figure out which standard to use: federal or state?
Before we delve into state overtime exemption, let’s explore the new overtime requirements under the Fair Labor Standards Act (FLSA).
The new FLSA/federal overtime rule:
- Increases the minimum salary level for exempt executive, administrative, and professional employees — also called “white-collar employees” — from $23,600/year (or $455/week) to $35,568/year (or $684/week)
- Raises the annual pay threshold for highly-compensated employees from $100,000/year to $107,432/year
- Permits up to 10% of nondiscretionary bonuses and incentive payments (such as commissions) to be included in the minimum salary level
- Updates the special salary levels for U.S. territories and employees in the motion picture industry
- Takes effect Jan. 1, 2020
To qualify as exempt under the FLSA, salaried employees must satisfy the FLSA’s job duties test relevant to their position plus receive at least the FLSA’s minimum salary level.
The new federal overtime rule does not make any changes to the FLSA’s job duties test, only to the salary level.
Cracking your state’s overtime exemption code
Some states have their own standard overtime laws for employees who are not exempt from overtime pay. These employees are called “nonexempt.” The state’s standard overtime laws may differ from the FLSA.
For example, Alaska, California, Colorado, and Nevada deviate from the FLSA by mandating daily overtime for nonexempt employees.
If your state does not have standard overtime laws for nonexempt employees, then the FLSA’s standard overtime requirement applies. In this case, your nonexempt employees must receive overtime wages at 1.5 times their regular pay rate for hours worked above 40 in a workweek.
Overtime exemption, however, refers to employees who are excluded from the FLSA’s overtime provision or their state’s overtime laws — which is why they’re called “exempt employees.” In other words, they do not have to be paid overtime if they meet the necessary FLSA or state requirements.
Many states follow FLSA overtime exemption rules. If your small business is located in one of those states, effective Jan. 1, 2020, you must comply with the new federal overtime rules discussed earlier. But if your state has its own overtime exemption laws, the first order of business is to examine your state’s requirements.
Example #1: California
White-collar employees in California must satisfy the state’s job duties test relevant to their position, plus earn at least the state-mandated minimum salary level in order to be exempt from overtime pay under California law.
Broadly speaking, the minimum salary level for white-collar employees in California is twice the state’s minimum wage for full-time employment (that is, 40 hours per week). More narrowly, the minimum salary level varies by business size. Effective Jan. 1, 2020, the thresholds are:
- $54,080/year for employers with 26 or more employees.
- $49,920/year for employers with 25 or fewer employees.
Example #2: New York
White-collar employees in New York must fulfill the state’s job duties test, and in most cases earn at least the minimum salary level in order to be exempt from New York’s overtime provisions. New York’s minimum salary level is quite multifaceted, varying by city, county, and business size.
For example, in New York City, the minimum salary level for exempt executive and administrative employees is:
- $1,125/week, on or after Dec. 31, 2018, for employers with 11 or more employees.
- $1,125/week, on or after Dec. 31, 2019, for employers with 10 or fewer employees.
Notice that exempt professional employees aren’t included in that equation. That’s because New York does not have a minimum salary level for exempt professional employees. Further, New York has different salary levels for Nassau, Suffolk, and Westchester counties and for the remainder of the state.
Example #3: Maine
When it comes to white-collar employees, Maine adheres to the FLSA’s job duties test. However, Maine has its own minimum salary level, which is 3,000 times the state’s minimum wage.
On Jan. 1, 2020, Maine’s minimum wage will rise from the current $11 to $12, making the minimum salary level for exempt workers $36,000, instead of the current $33,000.
Who will these changes impact?
The new federal overtime exemption rule affects salaried employees who are exempt from the FLSA’s overtime provisions and are earning less than the new minimum salary level.
State changes impact salaried employees who are exempt from the state’s overtime provisions.
If you fail to pay an affected employee less than the required minimum salary, the overtime exemption will be lost. At this point, the employee will become nonexempt and eligible for overtime under federal or state law. This is true even if the employee passes the job duties test. Remember, overtime exemption is dependent on both the job duties test and the salary level test.
When federal and state rules collide
What should you do if your employees are subject to both FLSA and state overtime exemption rules? Here, the standard most favorable to the employee prevails.
In California, the state’s minimum salary level applies to exempt executive, administrative, and professional employees, since it’s higher than the FLSA’s.
In New York, the state’s minimum salary level applies to exempt executive and administrative employees, since it exceeds the FLSA’s requirement. However, exempt professional employees are subject to the FLSA’s salary threshold, since they’re excluded from New York’s salary requirement.
Employers in Maine should use the state’s minimum salary level of $36,000, effective Jan. 1, 2020, since it surpasses the new federal requirement of $35,568.
If your state has overtime exemption laws, you’ll need to monitor developments at the federal and state levels to ensure accurate application. If you conduct business in multiple states, your responsibilities are even more intricate; you’ll need to stay abreast of the laws for each state and compare them with federal standards.
Also important is reviewing not just federal and state minimum salary levels but also federal and state job duties tests. While many state job duties tests closely match the FLSA’s definitions, there might be subtle differences.
For instance, both the FLSA and California job duties tests for administrative overtime exemption say that the employee’s primary duties must include exercising discretion and independent judgment. Though the FLSA does not state the amount of time that should be spent on those primary duties, California defines “primarily engaged” as the employee spends more than half of their work time performing exempt work.
In most circumstances, state law prevails because it is usually more employee-friendly than federal law. However, the overtime exemption is a complicated issue. So, when in doubt, defer to legal counsel.