How Should You Prepare for the New 2020 Overtime Rules?

The Department of Labor issued a final rule update on overtime pay. The new rules will go into effect on January 1, 2020. These changes will likely have a significant impact on employee payroll processing, productivity and scheduling. So employers should take steps now to review the new thresholds and analyze their existing business to see what modifications may need to be made for time tracking, workforce scheduling and any budget adjustments that must be made to account for changes in payroll.

The new changes that will go into effect with the start of the new year in 2020 are as follows:

Increased Minimum Salary

The previous minimum salary test ($455/week 0r $23,600/year) for an employee exemption from overtime under Executive, Administrative, Professional and Computer employees has been raised to $684/week or $35,568/year. While the definitions for the exempt job classification categories have not changed, employers would be well advised to review their employees’ current job descriptions in conjunction with wages paid to ensure that exempt employees are correctly categorized. Up to 10% of the salary may come in the form of “incentive pay” including non-discretionary bonuses, commissions and other incentive payments. An employee who does not make the minimum salary by the end of a 52-week calendar period may either be paid a “catch up” payment to cover the difference (must be paid within one pay period of the 52-week cutoff) or can retroactively be downgraded to a non-exempt employee with all overtime accrued throughout the year being accounted and paid.

Note: A few states including California, New York and, in the near future, Washington state, have wage laws whereby the required minimum pay for exempt employees is higher than the new Federal limits. Therefore, employers in those states will not be affected by the change assuming they are already in compliance with their state mandated requirements.

Adjusted Baseline for Highly Compensated Employees

In addition to the minimum salary threshold, the baseline for Highly Compensated Employees (HCEs) has also been increased to $107,432 per year. Of that, $684 must be paid on a weekly basis as standard salary and cannot be reduced as part of an incentive program. The rest of the employee’s income may come in the form of incentive pay. As with the minimum salary, if the threshold is not met within a year, the employer may choose to make a catch-up payment or make the employee non-exempt and pay for any accrued overtime.

Future Increases

The Department of Labor has committed to making future adjustments to the salary thresholds, but these will not be automatic. Instead, they will be made on an as-needed-basis and will following a notification and comment period rule-making process.

What should employers do to prepare?

Management teams should conduct an internal audit of current pay and hours for employees. If salaried employees who are at or near the minimum salary are not currently tracking their hours, you may want to install time clocks or provide another means to have them do so over the next couple of months so that you can adequately assess whether the best strategic approach is to make a salary adjustment for those employees so that they continue to meet the minimum salary test and remain exempt or change them to a non-exempt employee and provide overtime pay starting January 1, 2020.  Employers may also want to take this time to evaluate current shifts schedules, labor costs and productivity to make any additional changes that may help to reduce or eliminate overtime for some processes and could explore opportunities for job sharing, hiring additional help and/or temporary work arrangements.

When you are conducting your analysis of wages and hours, it is also a good time to ensure you are complying with your state’s minimum wage and overtime rules including future increases. You can utilize our, state-by-state listing of minimum wage rates and overtime laws for reference.

With a system like the CheckmateHCM Solution, employers utilizing the Payroll and Time & Attendance modules of the system would already have this data at their fingertips as well as the ability to quickly and precisely aggregate compensation information and drill down to individual employees with just a few clicks.