Chicago Area Employers Should Review Their Payroll as the Overtime “Exempt” Salary Threshold Went Up on January 1

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The threshold for white-collar employees to be classifiable as “exempt” rose about 50% to $684 per week (about $35,568 per year) on January 1, 2020. Employers will need to make adjustments to ensure they’re compliant with this updated rule, under the Fair Labor Standards Act, announced on September 24 by the U.S. Department of Labor.  By “exempt” I am referring to employees who do not qualify for overtime pay.

The rule change—which boosts the threshold from $455 per week and $23,600 per year, as previously set in 2004—will affect about 1.3 million workers, the DOL says, who could be reclassified as “non-exempt,” and thus eligible for overtime pay. Under the new rule, employers will be able to fill up to 10% of the $684 per week with non-discretionary bonuses, incentives and commissions, as long as those amounts are paid at least annually.

As has been the case all along, exempt employees also must perform specific “white collar” duties like executive, administrative or professional functions, and be paid on a salary or fee basis rather than hourly—unless, that is, the employee could be classified as highly compensated, defined as earning at least $107,432 per year under the new rule (up from $100,000 in the 2004 iteration), in which case they can be exempt no matter what they do.

In 2016, the Obama administration had attempted to double the existing threshold for exempt employees to $913 per week and would have lifted the “highly compensated” cutoff to $134,004.  But a Texas federal court enjoined that proposal, and the Department of Labor revised those figures somewhat downward.  The DOL now intends to revisit these cutoffs every four years, although unlike the 2016 proposal, updates will not be automatic and will require notice and public comment periods.

Starting January 1, employers will need to adjust their payroll to meet compliance, either by reclassifying employees who earn $455 to $684 per week as non-exempt, or giving them raises to at least $684 to keep them as exempt (and thus ineligible for overtime.)

Businesses should start by figuring out who on their payrolls will be affected and decide what to do case by case—either reclassifying, giving them a raise, restructuring their positions to change their type of assignment, or finding an exemption under the FLSA.

Once this is completed, employers will need to make sure their timekeeping and payroll systems are properly updated, and consider whether to adjust fringe benefits to account for higher payroll costs—while making sure that any such adjustments, or other actions such as layoffs, are not cause for a discrimination action or other legal claim.

Regarding current exempt employees who become non-exempt, employers may want to revisit their eligibility for flexible or remote work schedules, along with whether such employees should be allowed continued remote phone or e-mail access, and use of company cell phones. Newly non-exempt employees also will need to be trained on timekeeping processes and informed of their new obligations to their track their hours.

Finally, to ensure all employees are properly classified under the new rule—and to ensure that they have been, in any case—employers should consider conducting a thorough wage-and-hour audit. This could help correct current misclassifications as well as heading off any new ones. These obligations also may differ from state to state, and vis-à-vis the Fair Labor Standards Act, so businesses need to ensure compliance with their governor’s rules, as well.

If you need assistance with your employment issues, contact the experienced Chicago Area Business Lawyers at Bellas & Wachowksi.