Brace yourself, employers. The new overtime rule is coming for you in 2020.
As an employer, you know all too well how confusing overtime rules can be. And starting in 2020, they’re going to get just a little bit more complicated.
If you’re not sure about all this overtime commotion, here’s the scoop. In January 2020, the DOL new overtime rule will be rocking many employers’ worlds. According to the Department of Labor, this new rule will make roughly 1.3 million workers newly eligible for overtime pay.
So giddy-up for the new changes, my fellow employers. Read on to discover how the new overtime rule will impact your business and what changes your company might have to make to comply with the new rule.
What The New Overtime Rule Entails
Starting January 1, 2020, the FLSA salary threshold will be increasing to $35,568 annually, or $684 weekly.
To put things into perspective, the salary threshold for exemption was $23,660 per year, or $455 per week before the overtime rule update.
So, you might be asking, What does this mean for my business, Mike? OK, OK, I’ll get to the point already. The new threshold means big changes for some of your employees. The threshold change could make many previously exempt employees newly nonexempt.
You likely know by now that exempt employees are not eligible for overtime. The new rule and more employees becoming nonexempt means one thing: more employees will be eligible for overtime pay.
As a reminder, an employee is exempt if they meet all of the following:
- Be paid on a salary basis
- Earn at least the FLSA salary threshold ($35,568 per year starting in 2020)
- Have executive, administrative, and professional job duties
OK phew, So that’s it, right? Wrong. The DOL’s new overtime rule also changes the annual compensation requirement for highly compensated employees to $107,432 per year (originally $100,000). Under the FLSA, a worker is considered to be a highly compensated employee if they meet all of the following qualifications:
- Earns $107,432 or more per year (originally $100,000 or more per year)
- Performs office or non-manual work
- Regularly performs at least one of the duties of an exempt executive, administrative, or professional employee
In addition to the FLSA, the IRS also has its own definition of a highly compensated employee. According to the IRS, a highly compensated employee is an individual who meets one of the below requirements:
- Owned more than 5% of the interest in a business at any time during the year or preceding year
- Received compensation from the business of more than $125,000 in the preceding year (if the preceding year is 2019, $130,000 if the preceding year is 2020), and was in the top 20% of employees when ranked by compensation (if the employer chooses to rank)
Rules for highly compensated employees were put in place to prevent discrimination between high- and low-wage workers (e.g., 401(k) rules). With the highly compensated employee rules, employees who fall into this group won’t have an unfair advantage when it comes to retirement plans and other benefits.
But wait, there’s more! Employers can also now use nondiscretionary bonus compensation and incentive payments to pay up to 10% of the new exempt salary threshold.
Ways To Prepare Your Business For The New Overtime Rule
January 2020 is quickly creeping up on us. That means we are only a few short weeks away from the new overtime rule going into effect. Before we say goodbye to 2019 for good, you need to know how you can prepare for the 2020 overtime rule.
Brace yourself for the upcoming overtime rule by following the four steps below.
1. Roundup Overtime Rule Information
Before you can be roaring and ready to go for the new overtime law at your business, you need to do your homework.
You can study up for the big new overtime 2020 “test” by doing the following:
- Keep up with news about the new overtime rule
- Read articles from reliable payroll and tax professionals
- Subscribe to blogs that discuss the upcoming overtime rule
The more educated you are about the new 2020 overtime rule, the better off you’ll be. You don’t want to be scrambling at the last minute trying to find out your employer obligations and responsibilities, so make sure you start preparing before the year comes to a close!
2. Check Exempt Employees’ Salaries
Take a look at each of your exempt employees. Do they earn at least $35,568 per year? Yes? Then you’re in the clear.
But what about the exempt employees earning less than $35,568? What do you do with them? Well … you have a few options. You can increase salaries, limit overtime, or pay overtime wages.
If you opt to increase salaries, consider giving both exempt and nonexempt employees pay raises. That way, you can close the wage gap and avoid wage violations. Not to mention, it keeps everyone happy campers.
You must pay any newly nonexempt employees overtime wages if they make less than $35,568 annually. Overtime is time and a half (or 1.5 times) the employee’s regular rate of pay for any hours worked over 40 during a workweek. Before you begin paying newly nonexempt workers, brush up on how to calculate overtime if you plan on paying salaries.
If neither of the above appeals to you, you can also limit the number of overtime hours newly nonexempt employees can work. Overtime wages can quickly add up, especially if you have many employees working extra hours. If you plan on limiting or banning overtime, let your workers know ASAP. And, be prepared for some disgruntled responses.
3. Discuss Changes With Employees
If you have employees who are newly nonexempt due to the new overtime rule, you must, must, must talk to them about the upcoming changes. Again I repeat, you must talk to your affected employees!
To have a smooth transition, you need to discuss job changes, offer timekeeping training, and stay positive.
Inform your employees of any job changes coming their way. This might include telling nonexempt workers about:
- An overtime policy
- Task redistribution
- Overtime procedures
Newly nonexempt workers must also start tracking their time worked. Don’t leave nonexempt employees hanging with the time clock. Instead, provide a training session where nonexempt employees can learn how to use your timekeeping method.
If you don’t currently have a timekeeping system in place, what the heck are you doing?! Just kidding. But, you should look into purchasing a time and attendance solution so your employees can track their hours worked.
When you’re discussing the new overtime changes, it’s important to stay as positive as possible. Sure, some employees aren’t going to be too keen on the idea of becoming nonexempt. So, it’s your job to talk them through the changes and get them on board.
Let employees know that nonexempt status is not a reflection of their importance or performance. Inform your impacted employees on how the law is mandatory, how it is not a demotion, and how they can now earn extra income from overtime hours (you don’t ban overtime).
Depending on your business, it might be best to let the affected employees know in a group setting. That way, they will all learn about the changes at once and can follow up with questions. And remember, the more you positively promote the changes, the less likely your employees will come at you with pitchforks and torches.
4. Implement Changes By January 2020
New laws, especially the new overtime law, aren’t something you want to mess around with, ladies and gentlemen. Listen to me when I say this: Do not procrastinate when it comes to implementing the new 2020 overtime law.
Don’t push the new overtime rule to the side. Trust me, you’ll regret it. Instead of waiting until year-end (or even January) to get ready for the new rule, prepare your business for changes ahead of time.
We all know that year-end can be a busy time for small business owners. Heck, it’s my accounting and payroll software company’s busiest time of year. So before things start getting wild at your business at the end of the year, make sure you get your payroll ready for the new rule.
Before year-end, make sure you:
- Know which employees will be impacted by the new law
- Inform employees of any changes
- Update your payroll to reflect the changes
Employees classified as exempt must receive a salary of at least $684 per week by January 1, 2020. If an employee does not receive at least $684 per week, they are now considered nonexempt. Nonexempt employees will need to receive overtime pay for any hours worked over 40 in a workweek. So giddy-up and start preparing your payroll now!