Fair Labor Standards Act: The New Rule & What It Means for You
December 1, 2019- Joe Rotella, SHRM-SCP, SPHR, CPBA
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0Change is here
After more than 15 years and an attempted change in 2016, the U.S. Department of Labor (DOL) updated the Fair Labor Standards Act by issuing a final rule increasing the wage threshold for exempt employees. The new rule is scheduled to go into effect January 1, 2020 and will increase the number of workers eligible for overtime by 1.3 million. Before we look at particulars, let’s review just what the Fair Labor Standards Act is and what is meant by “exempt employees.”
Fair Labor Standards Act (FLSA)1
History
The FLSA is a federal law that establishes minimum wage, overtime pay, recordkeeping, and child labor standards that affect employees in the private sector and federal, state, and local governments. Before President Franklin Roosevelt signed it into law in 1938, efforts to protect workers (including curbing child labor and establishing both a minimum wage and a maximum hour standard for the work week) had met resistance from a variety of places ranging from the Supreme Court and Congress to some employers, predominantly from the South.
In the end, a much weaker bill than the one originally proposed passed both houses of Congress and was signed into law. The minimum wage was 25 cents.2 It has been raised 22 times since then and is now $7.25.
Types of employees
The FLSA divides covered employees into two types:
- Non-exempt – hourly workers; entitled to minimum wage and not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek
- Exempt – executive, administrative, professional workers who meet three tests regarding specific job duties, wage threshold, and salary-based pay3
Unlike hourly employees, exempt employees are not covered by the FLSA minimum wage and overtime provisions.
New Final Rule
Increased wage thresholds for exempt employees
On September 24, 2019, the DOL announced a final new rule4 raising the earnings threshold a salaried worker must meet in order to be considered an exempt employee. The wage thresholds, last updated in 2004, have been increased to these levels:
- From the current $455 per week to $684 per week ( $35,568 per year for a full-time worker)
- For “highly compensated employees” from the current $100,000 per year to $107,432 per year
Other changes
These other changes will also go into effect on January 1, 2020:
- Employers can use nondiscretionary bonuses and incentive pay to satisfy up to 10% of the standard salary level.
- The special salary levels for employees in the motion picture industry and in U.S. territories have also been raised.
What it means for you
Overtime
What this means for employers is that workers considered “exempt” under the old wage threshold who make less than the new $684 per week level are now eligible for overtime pay. The same is true for HCE whose salary falls below the new $107,432 annual salary level and who do not meet the white-collar duties test.
Employers have some options to consider. Their decisions will depend on the number of employees who will become newly eligible for overtime under the new rule and the cost of paying it.
What can you do?
Be prepared
Since the new final rule was announced at the end of September, employers are likely to already have a plan in place for compliance. Some may wonder if the law will meet with legal challenges like the Obama administration’s 2015 proposed new rule did. (Its implementation was stopped by a federal court ruling in Texas.) It’s best to assume that this rule will go into effect as planned, and be prepared to comply.
First employers would gather employee information and determine if they have workers who are currently exempt but who make less than $634 per week and will be eligible for overtime pay on January 1. If they do have employees who will fall into that category, there are a few options:
- Raise the employees’ salaries so they will be above the threshold and will remain exempt
- Switch the employees to being paid by the hour rather than with a salary
- Do a combination of both
As attorney Alexander Dunn says in Sharlyn Lauby’s article “New FLSA Changes 2019 – – What You Need to Know,”5 making those adjustments must be done carefully. Changes in salary or pay type can affect morale and company culture.
Technology can help
A powerful HRMS and Time and Labor software streamlines the process of gathering the salary, pay, and overtime hours and compensation employers need to know if they need to make adjustments and how they might do it.
No matter how information is gathered and what decisions are made, employers need to have a plan in place. Once January 1 arrives, employers must be in compliance or face possible penalties.
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