Pub.1 2019-2020 Issue 2

New Federal Overtime Rules M ost business owners probably already know about the new fed- eral overtime rules. You’ve probably already implemented them; if you haven’t, stop reading this article and take care of it. The U.S. Department of Labor exists to benefit wage earners, people looking for jobs, and retirees in the U.S. Its mission also includes improving work conditions, making profitable business opportu- nities available, and ensuring that employees are given work-related rights and benefits. After a failed attempt in 2016 by the U.S. District Court for the Eastern District of Texas to increase salary thresholds, the U.S. Department of Labor decided to gather information from people in 2017 and 2018. The response the department got made it plain that many people in the U.S. strongly sup- ported the idea. As a result, after a long process of determining which changes should be made, the Wage and Hour Division of the U.S. Department of Labor announced its new overtime rule on Sept. 24, 2019. The rule, which is the first change in overtime regulations since 2004, went into effect Jan. 1, 2020, and is intended to give 1.3 million U.S. employees the option of overtime pay under the Fair Labor Standards Act (FLSA). The changes apply to companies of all sizes, large or small. The department made the following changes: • The standard salary level below which full-time employees become eligible for overtime pay has been increased from $455 per week to $684 per week, or $35,568 per year. (This is higher than the $679 per week that was proposed March 7, 2019.) Eligibility depends on job duties, but this part of the change in rules should affect approximately 1.2 million employees. • The total annual compensation level for highly compensated employees is now $107,432 instead of $100,000. This change will affect approximately 101,800 employees. The proposal on March 7, 2019, would have had a higher cap at $147,414. • Many companies currently use nondiscre- tionary bonuses and incentive payments, including commissions, as part of the annual salary package for employees. That portion is now limited to more than 10%. At least $684 would have to be paid weekly on a salary or fee basis. • Workers in U.S. territories and creative professionals in the movie industry have special salary levels. These have now been revised, too. The federal government takes an interest in whether someone is highly compensated because of the advantage their wages give them when considering benefits such as those associated with retirement. However, the IRS has a different definition for a highly compensated employee than the Department of Labor. According to the IRS, an employee is highly compensated when: • They owned a business interest of more than 5% during the current year or the previous year. • Their previous-year compensation for 2019 was $125,000; in 2021 and after, their previous year compensation was $130,000. • They are in the top 20% of employees when ranked by compensation. Because the last update took place more than 15 years ago, the Department of Labor has committed itself to review the salary threshold again on a more regular periodic basis. However, future changes still won’t take place automatically. Salary thresholds will stay the same unless the Depart- ment of Labor acts to change them. What didn’t change? Overtime rules for the follow- ing careers stay the same: • Firefighters • Nurses • Paramedics • Police officers • Some laborers, including those who work production lines and who have no management responsibilities The job duties test is also staying the same. Employers can’t determine whether an employee is exempt or not based on salary or job title alone. They also need to take into account job duties. Exemptions include the following types of employment: • Administrative, meaning fields such as finance, HR and IT; it does not mean adminis- trative assistants, who are usually nonexempt. • Executive, meaning people whose primary job responsibility is managing employees. For those who live in California, an executive spends more than 50% of work time “exercis- ing discretion and independent judgment.” • Learned professionals such as certified public accountants, lawyers, physicians, scientists and teachers. • Creative professionals outside the movie industry who work independently and are engaged in an artistic and creative field. • Outside sales, where “outside” means outside the employer’s business location. The increases that were approved were extremely moderate from an employer’s point of view. The suggested changes in 2016 would have been bigger ($913 per week, or $47,476 per year) and would have mandated automatic increases every three years. The Department of Labor calculated its number by dividing salaries into percentages and selecting the 20th percentile as the point at which overtime requirements go away. This method is the same way the limits were calculated in 2004. It is not the way they were calculated in 2016, during President Obama’s administration. To determine whether the changes affect your employees, you will need to look at the numbers for any employees who did not have a salary exemption under the old rules. If they earn less than the minimum salary, then they need to track their hours and employers need to pay them over- time for working more than 40 hours per week. Although you are allowed to calculate the hourly rate by either ignoring overtime or taking overtime into account, be cautious about including overtime when making hourly rate computations. The resulting number would have to be higher than the minimum wage, and frankly, your employees might not be happy about your making that decision. Employers also need to consider any differences in rules for exempt employees versus nonexempt employees. More specifically, look at the following: • Do you make a distinction about working from home if an employee is exempt rather than nonexempt? • Are exempt employees allowed to set their schedules? Are nonexempt employees required to be at work at a specific time, such as 8 a.m.? Someone who has had the liberty of being exempt is not going to appreciate being required to follow a different set of rules because of the reclassification. Another important factor is where your business is located. States have to abide by federal law, of course, but they can also write laws that treat this particular federal law’s requirements as a minimum, not a maximum. In California, companies 20 UP DATE