Changes are on the horizon for the Fair Labor Standards Act. Although the law itself is not changing, the Department of Labor has altered some of the rules about who is considered an exempt employee who does not have to be paid overtime.

Here is a valuable guide to help you understand the new rules, help determine those employees that will be affected, and what to do next.

What Determines if an Employee is Exempt?

An exempt employee is one who is not entitled to overtime, which must be paid at 1.5 times the employee’s regular rate. The FLSA provides three standards that must be met:

1. The employee must be paid a salary, that is, their pay has to remain the same regardless of hours worked (Note that this does not mean that all salaried workers are exempt). They must be paid for any week they work.
2. The employee must earn a certain amount a week.
3. The employee must be one of the following:
   • A manager with at least two people reporting to them, with some authority to hire or fire, and with responsibility for the enterprise or a department.
   • An administrative worker who works in the office and does work related to management or general business, who has some degree of independent judgment.
   • A professional hired for their advanced knowledge in science or learning.
   • A worker receiving a high level of compensation.

These basic rules have not changed.

What did the Department of Labor Change?

The DOL changed the minimum amount of money an employee must earn in order to be considered exempt. Specifically, the minimum has increased from $455 per week, or $23,660 per year, to $684 per week, or $35,568 per year.

They also changed the threshold for a high level of compensation from $100,000 to $107,432 per year.

This means that a number of employees are likely to go from exempt status to non-exempt status as of January 1, 2020. Companies will need to decide what they are going to do to bring payroll into compliance with the new rules.

What Should Companies Do?

Companies are faced with one of two choices. The first is to start paying overtime to the affected employees. The second is to raise their compensation so it is in line with the new minimums.

Which choice you should make depends on the specific circumstances. If the employee seldom works over forty hours a week, then it may be better to reclassify them as hourly non-exempt. If their regular work week is consistently over forty hours a week, then you should consider increasing their pay to the minimum. You can also change them to an hourly rate that will result in about the same amount of pay, although in some cases this might bring you afoul of minimum wage laws.

In fact, the first thing you need to do is track the hours of employees who are currently exempt but under the minimum. Bear in mind that if you reclassify an employee, then time they spend dealing with work from home has to be tracked and paid for, possibly at overtime rates. If the person routinely answers emails after hours, it may be worth considering the raise option.

You should also look at how far below the minimum an employee is. Obviously, if somebody is currently making $34,000 then simply raising their salary by the relatively small amount is the easiest solution.

It may be worth doing a full audit of your current workforce.

What About Reclassified Employees?

If you are reclassifying employees as hourly, it is very important to put them through appropriate training. For example, they may not be familiar with your requirements for timekeeping and they should get into the habit of clocking in and out before the status change takes place. Employees who are used to answering work email from home on their own device should be informed that the policy no longer allows them to do this, as they have to be paid for every bit of work they do. Ideally you should put together a package to send to affected employees that includes policies and practices for non-exempt employees, the change to pay structure, etc. Incentive pay to non-exempt employees should be reconsidered, as it results in a lot of extra math.

Make sure that you abide by any rules your state may have for advance notice of changes to pay or issuing changes to pay in writing.

Additionally, managers who have not previously had to deal with non-exempt employees may also need training in policies and procedures. It is also a good idea to encourage everyone to track their time for productivity reasons, and because the DOL intends to increase the rate every four years going further.

Make sure that both sides know that travel time must now be compensated. Also you may have to deal with employee morale issues from losing the status of being salaried.

Are there Pitfalls to Just Giving Them a Raise?

You may well decide that the simplest solution is to raise people’s salaries. However, there are a couple of pitfalls. The largest of which is that you have to be careful to avoid wage compression or wages leap frogging. For example, Joe makes $34,000 and Jane makes $36,000. Jane has been at the company for five years. You raise Joe’s salary to $36,000 to get him above the threshold. Now suddenly they are making the same amount. You may find yourself facing loss of morale ... or even a sex discrimination suit because Joe got a raise and Jane didn’t. In other words, you may have to look at your entire salary structure.

You will also need to look at how the changes affect your overall budget. Are you going to have to cut the pay of employees currently receiving higher compensation? If so, how will that affect morale and turnover?

The aim of the rule is to start bringing overtime rules in line with increases in cost of living. For small and medium employers this can be a major burden, but the consequences of breaking the rules are extreme.

Fortunately, there are tools and guidelines to help you deal with the new overtime rule and do the math needed to establish your best next step.