Increase in overtime threshold expected

The U.S. Department of Labor is expected to propose a new overtime rule in May.

Once the new rule has been announced, stakeholders will have an opportunity to comment before it’s finalized. Analysts are widely predicting an increase to the exempt salary threshold and warning employers to prepare.

As a refresher, the Fair Labor Standards Act (FLSA) establishes that non-exempt employees must be paid overtime at a rate of at least 1.5 times their regular pay for all hours worked beyond 40 in a workweek. However, the FLSA provides an overtime exemption for “white collar” employees who meet certain criteria.

To qualify for the exemption (meaning overtime pay is not required), an employee must serve in a bona fide executive, administrative, or professional role and must be paid on a salary basis of at least $684 per week or $35,568 per year.

That salary threshold was last set in 2019. While there are no official estimates for how high the new threshold will be, it’s worth noting that the DOL had finalized a threshold of $921/week in 2016, before being challenged in the federal courts.

Some worker advocates are advocating for the 2016 number (or higher), and some analysts believe that’s what we’ll see. Meanwhile, others suggest the increase will be closer to $800, finding modest middle ground between the current level and the failed 2016 setpoint.

How to prepare

Employers can start preparing for an increase by evaluating employee salaries and job duties. If exempt employees are paid below the new threshold, the organization may opt to increase their salary —thereby protecting their overtime exemption — or reclassify the employee to a non-exempt status.

These changes aren’t always simple, however. If you reclassify an employe to an hourly rate, they may feel like they’ve received a demotion. Bonus and incentive programs may also need adjusting.

Furthermore, changes in one employee’s pay rate can have a reverberating impact across the organization, if people feel like they are now undercompensated when compared to other roles.
At the same time, it’s generally a good idea to review employee job duties to ensure they do qualify as a “bona fide” executive, administrative, or professional in nature. Note that job titles alone do not determine an exempt status under the FLSA. Here are some other key elements:

• Executive duties involve managing the company or a department, regularly directing the work of at least two employees, and having the authority to hire or fire employees.
• Administrative duties involve performing office or non-manual work directly related to the management or general business operations of the employer or its customers.
• Professional duties involve performing work that requires advanced knowledge in a field of science or learning, such as law, medicine, accounting, or engineering.

Employers should evaluate each employee’s job duties and salary to determine whether they meet the white-collar exemption criteria. Keep in mind that some local and state governments have set their own salary thresholds and duty tests.

The proposed rule change may include other adjustments, including changes to exempt duties tests, future automatic increases to salary thresholds, and/or a rate increase to the “highly compensated employee” threshold which reduces duty test requirements.