FLSA 2020 Changes Explained
For those of you who remember, in 2016 the DOL created quite a stir by proposing a raise to the salary test for overtime exemption. The raise was quite high, more than 2x the current rate, and caused many companies to seriously reevaluate whether they needed to raise salaries to meet this new standard or reclassify employees as non-exempt (meaning they must be paid overtime). About half of the companies I was working with at the time reclassified at least some of their employees and figured out ways to manage overtime and the other half raised their salaries to meet the (proposed) salary minimum. Hopefully those that raised the salaries also had a labor attorney review their job descriptions, as the salary test is only the first part of the test.
The second is the duties test. Just because an employee’s salary meets the salary minimum, does not mean they will also pass the duties test. To be exempt from overtime they must ALSO fall under one of the standard exemption categories (outside sales, executive/managerial, administrative, highly compensated employee, retail, truck drivers involved in interstate commerce, and a few other industry specific exemptions). It should be noted that in the FLSA code (don’t shoot the messenger here, please) it specifically states that “Inside Sales” employees are non-exempt. Meaning you should be paying them overtime. I’m not an attorney and I’m not giving legal advice, but many of my clients have employees that are quite clearly “Inside Sales” so you need to be sure that you have reviewed your situation with a labor attorney and that they have provided appropriate counsel as to how you should be classifying these employees.
New Salary Threshold
The new salary threshold that will go into effect January 1, 2020 is $35,568 ($684 per week) and the new Highly Compensated Employee level will be $107,432. Please see https://www.dol.gov/whd/overtime2019/ for more details. Importantly, you can now use non-discretionary bonuses (meaning you use a formulaic method to determine pay) or commissions (% of margin or profit) for up to 10% of the salary requirement, provided it is paid at least annually.
Recoverable Draws
Note that a recoverable draw could fail the salary minimum test (as it’s not guaranteed pay) and a non-recoverable draw is really a salary that is just doing double duty as an incentive threshold. It’s best (for both DOL issues and for recruiting) to call it what it is and refigure your incentive to use a threshold (which can be the same level that is required to cover the draw), before additional pay is earned. It’s a semantical distinction, yes, but it’s one we highly recommend.
Bottom Line
If you have employees paid LESS THAN $35,568 per year in guaranteed pay (it doesn’t have to be paid weekly – could be bi-weekly or semi-monthly) AND these employees are not currently being paid overtime, you should contact a labor attorney to see if you will need to make some adjustments to their pay levels. If you are using incentive compensation (non-discretionary bonuses and/or commissions) then the guaranteed amount must be $32,011 (90% of the total) and they MUST make up the other 10% in incentive payments paid at least annually. If they do not “earn” the incentive from poor performance, you could run afoul of the salary minimum so be sure your incentive program is such that you are certain they will make at least $3,557 in incentives each year. Per the DOL guidelines you will have 3 months after January 1, 2020 to make the necessary adjustments to your payroll.