New Overtime Pay Rules Now in Effect for 2020
New overtime pay rules went into effect on New Year’s Day. Here’s what you need to know about them.
For the first time in 15 years, the federal government has updated the rules regarding overtime pay, causing more than 1 million workers to qualify for premium pay. The new requirements went into effect on January 1, 2020.
In the final rule, the Department of Labor (DOL):
- Raised the “standard salary level” from the previously enforced level of $455 a week to $684 per week
- Raised the total annual compensation level for “highly compensated employees (HCEs)” from the currently enforced level of $100,000 to $107,432 a year
- Allows employers to use nondiscretionary bonuses and incentive payments that are paid annually to satisfy up to 10% of the standard salary level
- Revised the special salary levels for workers in U.S. territories and in the motion picture industry
Fair Labor Standards Act
The Fair Labor Standards Act (FLSA) sets minimum wage, overtime pay, recordkeeping, and youth employment standards for employees in the private sector and in federal, state, and local governments.
The federal law applies to employers whose annual sales total $500,000 or more or who are engaged in interstate commerce. Most workplaces are covered by the federal law because courts have widely interpreted the term “interstate commerce,” ruling, for example, that companies that regularly use the U.S. mail to send or receive letters to and from other states are engaged in interstate commerce.
The FLSA requires that covered employers pay employees an overtime rate of at least one and one-half times their regular rate of pay for all hours worked over 40 hours in a workweek unless the workers are exempt.
The FLSA requires that covered employers pay employees an overtime rate of at least one and one-half times their regular rate of pay for all hours worked over 40 hours in a workweek unless the workers are exempt.
For most employees, whether they are exempt — which means they don’t have to be paid overtime — or nonexempt depends on 3 things:
- How much they are paid
- How they are paid
- What kind of work they do
Under the previous rules, workers were exempt from overtime pay requirements if:
- They were paid at least $455 a week
- Paid on a salary basis rather than on the number of hours they work, and
- Perform “white collar” work
“White collar” work means work that is either executive, administrative, professional, outside sales, or computer-related as defined by the Labor Department.
Salary threshold
The $455 a week earning threshold, which is $23,660 a year for a full-time worker, was set by the Department of Labor (DOL) in 2004 and has remained there until this year’s new salary threshold went into effect. Now, the minimum salary threshold has risen to $684 a week or $35,568 a year.
According to the Labor Department, increases to the salary thresholds are “long overdue” in light of wage and salary growth since 2004 and that it had received near-universal support for updating the numbers.
The federal agency has long used the salary level test as a tool to help define white-collar exemptions on the basis that employees paid less than the standard salary level are unlikely to be executive, administrative, or professional employees. However, the agency now states the salary level test’s usefulness has diminished, as the wages of employees increased and inflation reduced the real value of the salary threshold.
The new rule does not call for an automatic update to the salary threshold, although that was proposed in the 2016 rules that never went into effect.
DOL says the rules defining the type of work an employee must do to qualify as exempt are still the same:
- Executive
- Administrative
- Professional
- Outside sales
- Computer
Some employees, such as business owners, doctors, lawyers, teachers, and outside sales employees, are not subject to salary tests.
Other earnings threshold changes
The Labor Department also raised the total annual compensation level for “highly compensated employees (HCEs)” from the previously enforced level of $100,000 to $107,432 a year. HCEs must also satisfy a job duties test. An estimated 101,800 employees who were exempt under the HCE test are affected by the increase, according to the Labor Department.
In addition, the salary levels for workers in U.S. territories and in the motion picture industry were also revised. The special salary level for workers in Puerto Rico, U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands is now $455 a week. The special salary level for workers in American Samoa is now $380 a week. The base rate threshold for employees in the motion picture industry is now $1,043 a week.
New calculation for regular rate of pay
Another important change for employers who must comply with the FLSA is that the Labor Department also revised the calculation for a worker’s regular rate of pay, in recognition of evolving pay practices. Employers can now use nondiscretionary bonuses and incentive payments, including commissions, that are paid annually to satisfy up to 10% of the standard salary level.
Obama administration attempt to change the rules
In a final rule published in May 2016, the Labor Department increased the standard salary level to $913 a week or about $47,476 a year. But that rulemaking was challenged in court by employer groups and several states.
A federal court in Texas invalidated the rule in August 2017, reasoning that it “makes overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.” That ruling didn’t stop the Labor Department from moving forward with a new and lower threshold.
State law
State laws should also be considered. Some states have stricter exemption standards than federal law; the FLSA does not preempt stricter state standards. In fact, under the FLSA, if a state establishes a higher standard than that provided by the federal law, the higher standard applies in that state.
For example, New York and California have salary thresholds that are either higher or more complex than the new federal threshold and experts say several states are moving in that direction.
Workaround
While more employers are expected to be on the hook for overtime pay, there is a workaround. Experts recommend that employers who have employees whose pay is close to the $35,568 threshold and who regularly work overtime, be given a raise. The increase in pay might be cheaper than paying overtime rates or hiring another employee to take on the overtime workload.
