US Department of Labor Final Overtime Rule – how does it impact my cash flows?

US Department of Labor Final Overtime Rule – how does it impact my cash flows?

CFO Connections attended a briefing from the US Department of Labor Wage and Hour Division on the final rule on overtime pay, effective January 1, 2020. Here are some of the important questions addressed during the briefing.

Q. How many workers will become overtime-eligible as a result of this Final Rule?

An estimated 1.3 million workers will become newly entitled to overtime protection because of the increase in the salary level.

Q. What will the “Overtime” Final Rule do?

The final rule updates the earnings thresholds necessary to exempt executive, administrative, or professional employees from the FLSA’s minimum wage and overtime pay requirements. They are exempt if they are employed in a bona fide executive, administrative, or professional (EAP) capacity, as those terms are defined in the Department of Labor’s regulations at 29 CFR part 541 .

Q. What is “overtime”?

Unless specifically exempted, employees covered by the FLSA must receive pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half their regular rate of pay. This rate is referred to as “overtime” pay.

Q. What determines if an employee falls within one of the exemptions?

To qualify for an exemption in this rule an employee generally must:

  1. be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
  2. be paid at least a specified weekly salary level, which is $684 per week (the equivalent of $35,568 annually for a full-year worker) under this final rule (the “salary level test”), the current salary level is $455 per week (the equivalent of $23,660 annually for a full-year worker); and
  3. primarily perform executive, administrative, or professional duties, as defined in the Department’s regulations (the “duties test”).

Certain employees are not subject to either the salary basis or salary level tests (for example, doctors and lawyers). The Department’s regulations also provide an exemption for certain highly compensated employees (HCEs) who earn above a higher total annual compensation level ($107,432 under this final rule) and satisfy a minimal duties test.

Q. May employers use bonuses to satisfy part of the new standard salary level test?

Yes. In recognition of evolving pay practices, the Department is permitting employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary test requirement. Such bonuses include, for example, nondiscretionary incentive bonuses tied to productivity or profitability (e.g., a bonus based on the specified percentage of the profits generated by a business in the prior year). The Department recognizes that some businesses pay significantly larger bonuses; where larger bonuses are paid, however, the amount attributable toward the EAP standard salary level is capped at 10 percent of the required salary amount.

For employers to credit nondiscretionary bonuses and incentive payments (including commissions) toward a portion of the standard salary level test, such payments must be paid on an annual or more frequent basis.

Q. May employers make a catch-up payment in the event that an employee doesn’t receive enough in nondiscretionary bonuses and incentive payments (including commissions) in a given year to remain exempt?

Yes, if an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given 52-week period to retain his or her exempt status, the Department permits a “catch-up” payment at the end of the 52-week period. The employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 52-week period). Any such catch-up payment will count only toward the prior 52-week period’s salary amount and not toward the salary amount in the 52-week period in which it was paid. If the employer chooses not to make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the previous 52-week period.

Q. When will these changes take effect?

The effective date of this final rule is January 1, 2020.

Q. What Should Employers Do Now?

The DOL estimates that approximately 1.3 million additional workers will now be eligible for overtime under this new rule.  Over the remainder of the year, employer should strongly consider taking the following steps:

  1. Identify employees who will need to be reclassified, i.e. current employees who are currently exempt but are paid less than $35,568 annually.
  2. Analyze the financial impact of either raising pay to the new threshold level, reclassifying the position as non-exempt and paying overtime, or lowering hourly pay to offset the overtime requirements.
  3. Review job descriptions and tasks to ensure that your employees are properly classified.
  4. Consider how pay changes or other changes in job assignments may impact your business.
  5. Consult with your employment attorney to ensure compliance and help maneuver your business through the DOL regulations and classification changes. 

We’ve highlighted the core of the final rule. For a list of complete FAQs, please go to the US Department of Labor website

During the briefing, the USDOL Community Outreach and Planning Specialist indicates that the DOL typically goes back two years when reviewing employers compliance with the overtime rule unless it finds employer willfully neglect compliance, in which case, DOL will go back three years. In addition, DOL investigators focus more on substance of the job duties rather than form and investigators typically interview employees to gain an understanding of their job duties.

CFO Connections is ready to help you determine the cash flows impact as a result of this final rule. Contact us for further discussion.