Department of Labor proposes changes in overtime regulations for white-collar staff

The U.S. Department of Labor announced a proposal in early March that would make 1.1 million more white-collar employees eligible for overtime pay.

The current salary-level threshold for white-collar exemptions is $23,600 annually, which equates to $455 per week. The Department of Labor’s new proposal seeks to increase the threshold to $35,308 annually ($679 per week)–nearly halfway to the Department of Labor’s 2016 target threshold of $47,476 ($913 per week).

While the new proposal is notably lower than the blocked attempt, it still marks a nearly 50 percent increase from the current wage threshold. As a result, the Department of Labor “estimates that 1.1 million currently exempt employees who earn at least $455 per week but less than the proposed standard salary level of $679 per week would, without some intervening action by their employers, become eligible for overtime.”

That’s a notable change that can have a direct impact on your employees’ compensation.

This move comes more than two years after a federal judge blocked another attempt to update the threshold for overtime eligibility, although the details of the proposal differ from the 2016 proposal.

Breaking down the new overtime salary-level threshold

The quick explanation of the new proposal is that employees who make less than $35,308 annually or $679 per week may be eligible for overtime pay. Overtime applies to any hours worked past 40 in a given week and will be compensated at a rate of one-and-a-half times an employee’s standard rate of pay.

Not all employees would be eligible for overtime pay, however. The job duties of an employee play a major part in deciding whether someone is eligible. As with the current salary-level threshold, employees must pass three tests to qualify for a white-collar exemption from overtime pay:

The salary basis test–Exempt employees must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.

The salary level test–Exempt employees must be paid a specified salary of at least $679 per week.

The duties test–Exempt employees must primarily perform executive, administrative or professional duties as defined by Department of Labor regulations. Duty definitions can be found on the Department of Labor website.

The new proposal also increases the salary level for highly compensated employees (HCE) from $100,000 to $147,414 per year. This group faces what the Society for Human Resources Management (SHRM) calls a “relaxed” duties test. As such, these employees are exempt from overtime if their primary duty is office or non-manual work and they routinely “perform at least one of the duties of an exempt executive, administrative or professional employee.”

It’s important to note that the term “white-collar exemptions” is used, as the new proposal maintains overtime protections for “blue collar” workers who perform tasks that involve “repetitive operations with their hands, physical skill and energy.” This includes no changes in overtime eligibility for any of the following professions:

  • Police officers
  • Firefighters
  • Paramedics
  • Nurses
  • Laborers
  • Non-management employees in maintenance, construction and similar occupations (carpenters, electricians, mechanics, etc.)

Another difference with the new proposal is that there are no plans to make automatic threshold updates in the future. This is a notable departure from the 2016 proposal, in which the threshold would change every three years to match the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region. This means that if the proposal were to go into effect, it would only lead to the $35,308 ($679 per week) threshold and not any pre-planned adjustments.

What can small business owners do?

Your options are largely the same as they were back in 2016, some of which may be more feasible than others for your company. The first is to pay newly eligible employees overtime pay for applicable hours. Another is to limit employee hours to 40 per week to stop any chance of overtime pay. Each route has drawbacks, as paying overtime will increase your payroll and limiting hours may lead to decreased productivity thanks to change in overall work hours.

If neither of those ideas sound appealing, there are some other alternatives. One possible way to mitigate the impact of overtime pay is to raise the wage of workers who are close to the salary-level threshold. For example, if an employee who regularly worked extra hours makes $34,000 per year, you could increase his pay to $36,000 per year. You’ll need to do the math to see if the change in pay outweighs the potential costs of overtime, but this method can help you control costs while still offering some reward to an employee.

A more cost-effective but less popular alternative is to lower the salaries of newly eligible overtime employees. This will help you account for overtime costs, but employees won’t approve of decreased pay if they’re eligible for overtime.

Protect your business through preparation

It’s important to take any proposed regulations seriously, especially when you can face a civil monetary penalty of $2,014 for repeated or willful violations of overtime rules occurring after Jan. 24, 2019. There are still plenty of steps the Department of Labor’s new proposal needs to take, but it’s always good to have a plan in place just in case.

 

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