Ask Human Resources: Exempt (Salaried) Earning Thresholds Set to Increase

By Jodi Schafer, SPHR, SHRM-SCP

UPDATES TO FLSA WILL TAKE EFFECT JANUARY 1, 2020

On September 24th of this year the Department of Labor (DOL) announced a long-awaited update to the federal wage and hour law that establishes minimum wage, compensable hours and overtime provisions.  By raising the salary threshold under which white-collar salaried workers qualify for overtime pay from $23,660 to $ 35,568per year, more than 1.3 million workers will get overtime protections or see a rise in their salary above that threshold.  This isn’t the first time the DOL has attempted to update the Fair Labor Standards Act (FLSA) in recent years.  Back in 2016, the Obama Administration also saw the need to raise the minimum earning threshold for exempt (salaried) employees – something that hasn’t been adjusted in more than a decade.  What was startling to employers at the time was that the DOL wanted to more than double the earning amount!   However, the DOL never got the chance.  A federal court in Texas issued an injunction at the 11th hour, just before the changes were set to go into effect, putting everything on hold.  And there it sat…until now.  Effective January 1, 2020, the new FLSA rule will:

  • raise the “standard salary level” from the currently enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker) – a more reasonable increase than the 2016 proposal;
  • raise the total annual compensation requirement for “highly compensated employees” from the currently enforced level of $100,000 per year to $107,432 per year;
  • allow employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices; and
  • revise the special salary levels for workers in U.S. territories and the motion picture industry.

To gauge the potential financial impact of these FLSA updates on your bottom line begin by identifying all current exempt employees making less than $35,568/year.  You can choose to (A) increase their salary to meet this new threshold by January 1st or (B) reclassify them as nonexempt.  For those employees making close to this new dollar amount, an increase could be the easiest route to go.  However, raising the pay of this subset of your workforce for reasons not associated with merit or tenure may cause a ripple effect with the rest of your staff.   Be prepared for a few “that’s not fair” and “what about me” discussions.

If the pay increase would be cost prohibitive or would cause too much internal strife, you will be forced to reclassify these employees as nonexempt and they will become eligible for overtime compensation.  If you are unsure of how much overtime your at-risk exempt employees are currently working, you should take these next few months to run a few time studies to help gauge the impact to your bottom line. 

If the amount of overtime worked is minimal, you may decide to

  • Convert their current salary to an hourly equivalent and pay time and a half for any hours worked over 40, or
  • Continue to pay your employees their current salary (base pay) rate, but require them to submit an exemption report for any hours worked above and beyond 40 so that time a half can be paid for those hours.

If the amount of overtime worked is significant, you may decide to: 

  • Limit their work hours and potentially hire part-time and/or temporary staff to fill in as needed, or
  • Reduce other benefits being offered to offset the anticipated increase in payroll expenses, or
  • Reduce base rates of pay so that when you account for the overtime costs (1.5 x the base rate), the net impact is budget neutral; assuming the reduced base rate doesn’t drop employee pay below minimum wage.

The last two options, while potentially budget neutral, are not great options for employee morale and retention which means that budgeting for the extra costs associated with increasing salaries, rising overtime costs or the addition of part-time staff needs to start now.