New Salary Law: Everything You Need to Know
A new salary law was released by the Department of Labor (DOL) pertaining to overtime. 9 min read
Updated October 20, 2020
New Salary Law
A new salary law was released by the Department of Labor (DOL) pertaining to overtime. It has raised the salary of exempt white collar workers from a previous minimum of $24,660 to a new minimum of $47,476.
The new threshold is in excess of twice as much of what the salary requirement is for the same group set by the Fair Labor Standards Act (FLSA). Under that Act, employees who are highly compensated have to be paid a minimum of $134,004 annually in order to be qualified for the exemption. This new figure was raised from $100,000.
The DOL has announced that it will update the salary levels once every three years. The change will increase the threshold of full-time workers who are salaried to the 40th percentile in the region of the lowest-wage Census. On August 1, 2019, the first adjustment is going to be posted 150 days ahead of the effective date of January 1, 2020.
The duties tests have not included a limit of time as to how much a white collar employee can give to performing nonexempt duties before losing the exemption. The Department of Labor did not change the duties tests, but felt that an increase in salary levels would supply a bright-line test for exemptions.
When determining whether or not an employee’s salary met the white collar exemption threshold, it did not require any incentive pay, commissions, or nondiscretionary bonuses. Only the actual salaries and fee payments were considered.
In DOL’s final rule, it will now allow as much as 10 percent of non-highly compensated employee’s salary threshold to come from incentive pay, commissions, and nondiscretionary bonuses. To be qualified as salary, however, payments of this type must be made at least quarterly.
The salary overtime law was changed, the DOL stated, because it will now permit Americans to keep more of their income. They estimate that the new overtime rule is going to help 4.2 million employees.
Changes To From Previous Overtime Rule
The new overtime rule from the DOL reveals which employees are going to be exempt from working overtime. Overtime does not need to be paid for employees to be exempt. When an employee is non-exempt, employers need to pay overtime for the hours worked overtime.
Exempt employees must meet three conditions to qualify. They must be salaried and must have administrative, executive and professional duties. These qualifications remain the same. They also must be paid above the threshold salary level. This level is set by the new overtime rules from DOL. Because the salary threshold has been raised, it means that fewer employees will be considered exempt from overtime. Prior to the threshold being raised, it was set at $455 each week, which is $23,660 per year.
The payroll budgets of small businesses are going to get more complicated. The threshold’s minimum will be raised automatically every three years, depending on wage growth. The new ruling will also update salary levels for employees who are highly compensated. At the present time, they must make a minimum of $134,004 in order to be considered highly compensated.
What Does It Mean For Small Business Owners
Most small business owners are not able to increase their budgets because of wages and salaries. For most of them, the payroll is by far the largest expense on their budget. Small businesses that have less than 10 employees are spending about two-thirds of the total of their expenses on employee-related costs. Businesses that have more than 10 employees spend a little more than half of their expenses on employee-related costs. How the new overtime law will affect businesses depends on how many non-exempt employees that business employs once the threshold actually becomes raised.
Businesses that only have employees who are non-exempt will not be affected by the new overtime law. Those employees count on being paid for their overtime hours above 40 hours each week and need the money. When the new law turns exempt employees into non-exempt employees, it will certainly increase payroll costs. It will likely result in businesses having to make considerable adjustments to their business. The result will be that employers will have a choice to either give their employees higher salaries, or they will need to pay for hours worked at overtime rates.
There are some options that small business owners have for coping with this potential problem. They can increase their employee salaries higher than the threshold level. If they give their employees a lot of overtime hours, it would be important to calculate which would cost more – raising their salaries above the threshold or just paying the overtime. This will enable employers to decide which action is better in terms of cost.
Employees should be given wages that are below the threshold level, which would enable them to be paid for overtime. The new DOL law says that any employee below threshold level is classified as non-exempt and they must be paid at a rate of one-and-a-half times their regular wages per hour. The number of overtime hours per week can be capped by the employer, which will enable them to keep some control of the budget.
Next Steps as an Employer
Employers will also need to decide what to do with employees who are currently exempt, but will not be when the new rules come into effect. Find out, first, how many white collar employees will fall into this category. Then look at each of their responsibilities to determine whether or not they meet the qualifications of the duties test for an exemption. If these qualifications are not met, then they must be considered as non-exempt, and they will have to be paid for all overtime hours.
You also need to find out if you have any employees who are exempt, and you are paying them a salary. This means that they receive their salary every pay period without any reductions or increases due to workload or quality of work. If an employee currently qualifies for an exemption, but their salary will not meet the new threshold levels when they change, find out which would cost less: increasing their salary to meet the new threshold levels, or to keep their salary the same but start paying them for overtime hours at a rate of one-and-a-half times the hourly pay for every hour above 40 hours each week.
If there are going to be employees who will no longer be exempt, it will be necessary to provide some instruction. You will have to let the employee know of the changes and provide training, the supervisors will have to be trained about the new laws and your new guidelines, and payroll staff will also need to be informed about the new practices. Then, in order to keep tight control of the budget, ensure that these employees do not work many overtime hours.
It may also be possible to adjust their base rate at which they are paid, so that, along with overtime, they earn about as much as they did before. In order to benefit the exempt employees, you can set up procedures to update their salaries every three years to ensure they meet the new levels set by the DOL’s changes.
Transitioning To the New Overtime Rule
It will be necessary to explain the new overtime law to your employees. Relationship building can make it easier to deal with change in a company. Small business owners need to be aware that the new law will not only affect your business, but it will also affect the lives of your employees. By keeping them informed, you help them to adjust more easily.
Let your employees know in advance how the new law is going to affect them. Be sure to inform them that the changes are to enable you to be compliant with the new law, and also about changes in their pay, their duties on the job, and in their schedules.
For employees who will become paid hourly, let them know that it could mean more pay because they will have to be paid for all overtime work. If pay is reduced to cut the costs on payroll, you can most likely be sure that you will have some disgruntled employees on your hands. If you have to do this, you may cut down on their responsibilities to be compatible with the new pay and schedules.
New Law Bans Employers From Asking About Salary History
It is expected that employers will no longer be allowed to ask about your salary history. The proposed bill in New York City is expected to be passed. The goal of the bill is to reduce the salary gap that exists between the pay of men and women. It is hoped that it will eliminate further discrimination because of women’s previous salaries.
The bill also prevents employers from asking previous or current employers about salaries as well. They will also be prohibited from searching public records to find out this information, too.
Those who opposed the bill were critical of the fact that it did not prevent committees from checking with other departments when a woman is being considered for an internal promotion. As a result, they say, it was not carefully presented to employers for their opinions and suggestions, and it is apt to bring a lot of litigation against employers.
Reception Towards The New Overtime Rule
One federal judge in Texas, Amos Mazzant, has already placed a preliminary injunction against DOL’s new overtime rule. The injunction will mean that doubling the amount of salary needed to be exempt is not likely to survive. The new level was set to be at $47,476, which means that anyone making less than this amount would have to be paid overtime at overtime rates.
The new rule means that small business owners will have to make a choice – one that is not going to be popular with them. They will either have to increase the wages of their employees above the new threshold level, or they will have to make currently salaried employees into hourly ones. Making them into hourly employees will enable them to better account for hours worked and enable them to control their budget better. Unfortunately, business owners see neither option as being a good deal.
The U.S. Secretary of Labor, Thomas Perez, claims that it will restore worker protections in this country. The Department of Labor, in reviewing the overtime law, stated that it will give more money in the pockets of a lot of middle class workers – or enable them to have more free time.
The conclusion seems to completely ignore the possibility that some small businesses with low margins are not going to be able to adapt to the new law. As a result, it will be necessary to reduce jobs, which hurts them even more. It will also leave their employees with even less job and income security.
One study that was conducted by the American Action Forum drew the conclusion that of those 4.2 million people who are going to be affected by the new law, that their wages are expected to drop by 0.8 percent. In addition, the number of working hours for that group is estimated to drop by 0.2 percent. Many employees are apt to lose their jobs.
Another group, the National Retail Association said that changing the overtime pay is apt to do three things. It will likely include:
• Reducing the opportunity for job advancement.
• Lead to the hiring of more part-time employees.
• Cut the number of hours of full-time workers.
The NRA also does not expect the results to be good for many people. They report that they estimate that 2.1 million employees in the retail and restaurant fields will be hit hard. They predict that as many as 32 percent of them will go from being salaried to hourly workers, and another 11 percent can expect their hours to be cut to less than 40 per week.
The last Presidential Administration stated that the new rule requiring a raise in the wages of Americans will strengthen the middle class. However, many do not see that happening. Trying to present wage mandates to bring greater prosperity cannot guarantee a free lunch. Some expect problems that cannot yet be foreseen or measured.
The rule also affects some issues that many workers deal with now. It includes having to respond to emails or other communications after hours. By demanding an hourly pay, it makes it very difficult to control – or even desire; yet it is often important and necessary for a business to expect it. Telecommuting is another issue that will certainly be affected by it. It is apt to limit the flexibility that it gives employees so that the hours can be better supervised.
It is quite likely that this new rule is simply an effort, although misguided, to raise the pay of millions of Americans. Although the goal may have been good, the actual result is that there is now a greater burden on small businesses and the people they employ.
If you need help in understanding the new salary law and how it will affect you or your business, you can post your legal need on the UpCounsel’s marketplace. UpCounsel chooses to only use lawyers who have graduated in the top five percent of the top law schools such as Harvard Law and Yale Law, and who also have an average of at least 14 years of legal experience. Many of them have worked with or on behalf of such companies as Google, Menlo Ventures, and Airbnb.