As the Business Journal reported last month, the U.S. Department of Labor will implement a new overtime exemption salary threshold this coming January, and a local attorney is sharing additional guidance on how to comply.
On Sept. 24, the DOL announced its rule updating the minimum salary level required to exempt executive, administrative or professional employees from overtime, a move that will make about 1.3 million more American workers eligible for overtime pay under the Fair Labor Standards Act, as the Business Journal reported Oct. 4.
Effective Jan. 1, the threshold for exemption of eligible employees from overtime pay for hours worked past 40 per week is $35,568, up from the $23,660 in effect since 2004.
In terms of weekly pay rates, the threshold change is from $455 to $684 per week.
The new rule came after the DOL under President Barack Obama’s administration in 2016 sought and failed to raise the overtime exemption threshold to $47,476 per year — a move which would have made about 4.2 million more U.S. workers eligible for overtime pay.
Mark Smith, a human resources and employment law attorney at Rhoades McKee, said the short implementation timeframe means employers should take “prompt action” working with legal counsel to consider their options and choose a means of compliance.
He told the Business Journal last month that employers with salaried workers whose pay falls below the threshold would have two options: raise the affected employees’ salaries above the threshold or convert them to hourly workers and pay them overtime for hours worked past 40 per week.
But he said in a recent legal alert to clients that those two options are “more complicated than they appear at first glance,” involving perhaps more expense and certainly more work.
That’s why he added a third option to consider: Leave the formerly exempt employees on a salary that is nonexempt from overtime.
He said under this option, “The employer and employee agree how many hours the fixed salary represents. The number of hours can be fewer than, equal to or greater than 40 hours per week. The salary can be any sum if the amount, when divided by 40 hours, equals or exceeds the minimum wage which, in Michigan, increases to $9.65 per hour effective Jan. 1. Using this option, employees are only paid the salary for actual hours worked and are paid overtime for hours worked over 40.”
He provided a couple of examples of how this could work, all of which would involve the employee keeping track of hours worked:
Salary based on 40 hours per week: Say the employee used to receive a salary of $32,000, which equates to $615.38 per week or $15.38 per hour. If the employee works fewer than 40 hours, $15.38 would be multiplied by the hours worked. If more than 40 hours, the employee would receive $23.07 for each additional hour, or 1.5 times the base rate. If the employee never exceeds 40 hours, the annual pay would be the same $32,000 that was paid in the past.
Salary based on 45 hours per week: Say the employee used to receive a salary of $32,000, which equals $615.38 per week, or $13.67 per hour. If the employee works fewer than 40 hours, $13.67 would be multiplied by the hours worked. If the employee works the scheduled 45 hours, the $615.38 would be paid, plus the employee would receive half-time pay of $6.83 per hour for the hours worked between 40 and 45, resulting in an extra $34.17 per week. Hours worked beyond 45 would be paid at the rate of $20.50 per hour, or 1.5 times the base rate. If the employee works only 45 hours per week, he or she would receive $33,777.10 per year — $32,000 base rate, plus $1,777.10 in overtime — which is still below the new salary floor.
Smith said this third, two-part option, while involving a bit more math, could be less likely to draw the scrutiny of the DOL for possible misapplication of the rule and also less likely to attract resistance from employees facing perceived demotions from salaried to hourly.
Whatever route employers choose to go, Smith noted companies that don’t comply and pay overtime to eligible workers will be liable for the amount that should have been received, plus attorney’s fees and an additional amount as a penalty during a lookback period of three years.
“Given the well-publicized nature of the new regulations, employers who get it wrong may well face three years of damages,” Smith said. “Depending on the number of employees involved, the exposure to damages can be significant.”