Are you ready for a higher white-collar salary threshold?

By Brenda LaMarche | HR Column

Starting Jan. 1, 2020, more than 1 million white collar workers will be eligible for overtime pay, and more companies will be responsible for paying overtime. Why? Because, unless the law is blocked as it was in 2016, the salary threshold for white-collar workers is going up to $684 per week, or $35,568 per year. This means salaried workers currently making less than that will be entitled to overtime pay for all hours worked over 40 per week.

Is your company ready for this change?

Most experts believe the change will go through with no legal battles this time because this threshold is based on the 20th percentile of salaries in the South Census Region and/or in the retail industry, and the Department of Labor made use of extensive public comment periods, listening sessions as well as long-standing calculations to arrive at the new level. It has been 15 years since the Fair Labor Standards Act received significant modifications, so you may not have experienced a change like this or considered how this law affects your business.

What should you do to prepare for this change?

Review your payroll and current salaries. Check to see who falls under the threshold of $684 per week.

Assess job descriptions. Take a close look at job descriptions and job duties, as job titles alone will not suffice in determining eligibility for overtime. The work an employee actually performs determines whether or not the position qualifies as exempt using the duties tests available on the Department of Labor website.

The job description should designate which positions are salaried (exempt) and which are hourly (non-exempt). Determine what the next steps for each employee will be (changing to hourly or increasing salary) due to this regulatory change once you have evaluated the duties and salaries of each individual.

Budget for possible increases in payroll. Remember when budgeting that paying overtime also increases FICA taxes and may affect 401(k) matching, disability insurance, workers’ compensation coverage and other expenses. Perform a thorough financial analysis to figure out if it’s less expensive to hire another employee or pay overtime to existing employees.

There are several formulas that can be used to convert an employee from salaried to hourly. Employers do not have to simply divide the annual salary by 2080 hours (for a 40-hour work week) to get an hourly rate. Many employers expect employees to work more than 40 hours per week and can include the overtime hours in the calculation of an hourly rate.

The rules and some of these options can be found on the Department of Labor website at dol.gov/whd/overtime2019/ and in the Overtime Pay Fact Sheet #23.

Watch out for pay compression. Pay compression can occur when you choose to increase the employee salaries that are below the threshold to be at or higher than the new threshold and you don’t increase those who already above the threshold. When other salaries remain the same, some newer employees may end up making as much as longer-term employees. Employers may need to take steps to address these issues and avoid morale problems.

Address which employees should track their time. All non-exempt employees need to track their hours worked each work week to determine overtime pay. Non-exempt employees can be paid hourly or on a salaried basis, but all must track hours worked. Remember, salaried non-exempt employees must be paid their salary each pay period plus overtime if worked.

Evaluate benefits packages, too. Reclassifying employees can change who is eligible for benefits. For example, group life and disability insurance is sometimes only offered to salaried employees. Group life and disability coverage is an affordable way to improve benefit packages for full-time employees and improves retention.

Be prepared to communicate. Take the time to plan for the change and any communication related to it. If at all possible, let employees who are experiencing the change from salaried to hourly get used to working as hourly. They’ll need to track their time and you’ll need to pay them for overtime. Tread carefully here, as any communication to affected employees should be done thoughtfully and completely in order to achieve a smooth transition.

Jan. 1 is coming soon. Work with your HR professional and follow these steps as soon as possible to stay in compliance with the Fair Labor Standards Act.

Brenda LaMarche is president of BRL HR Consulting, a human resources consulting and outsourcing firm providing nationwide services, located in North Liberty.