The New Overtime Rule
Under the federal Fair Labor Standards Act (FLSA), employees must meet specific criteria to be exempt from overtime. These criteria require that employees:
- must be paid a salary of at least the threshold amount, or
- meet certain duties tests (more information here).
What hasn’t changed is that employees who are not exempt from overtime under the FLSA must be paid 1 1/2 times their regular hourly rate for hours worked after 40 in a workweek. Previously, if an employee made more than $23,660 annually—$455 a week—they would not qualify for overtime. Now, the new rule raises that threshold by $11,900. Meaning that for an employee to not qualify for overtime, they must make more than $35,568 annually or $684 in a week.
Additionally, the new rule does not include automatic adjustments to the exempt salary threshold. Employers are also allowed to make a catch-up payment to bring someone’s salary up to or past the minimum.
Factoring in Bonuses
If you give your employees bonuses that push them past the $35,568 threshold, does that mean they no longer qualify for overtime? The answer is, it depends.
Under the new rule, non-discretionary bonuses and incentive payments—including commissions—paid on an annual or more frequent basis can count towards the standard salary level. However, only up to 10% of the threshold salary ($3,556.80) would count.
Employee A makes $32,568, and gets a non-discretionary bonus of $3,050. Employee A could now be exempt because they’ve surpassed the threshold of $35,568.
Employee B makes $32,568, and gets a non-discretionary bonus of $1,500. Employee B probably is not exempt because their annualized salary has not surpassed the threshold.
Thus, you could have two employees with the same base salary, but one could be exempt, and one may not.
Why do we say "could" and "probably"? Because being exempt from overtime is not just about how much an employee makes, but also what their job entails.
The duties tests outline the executive, administrative, professional, etc. duties that an employee must do to be classified as an exempt employee. The new rules did not make any changes to the duties test under the FLSA.
3 Takeaways for Employers
In a recent Society for Human Resource Management (SHRM) article, Senior Legal Editor Lisa Nagele-Piazza, J.D., SHRM-SCP, said employers should immediately pull data for exempt workers earning below the new threshold.
Caroline Brown, an attorney with Fisher Phillips in Atlanta, suggests business owners should do the following three things:
- Review your budgets,
- consider what positions you might restructure, and
- flag whom you might reclassify to nonexempt or give a salary increase.
"Think about when, practically speaking, you should implement changes," adds Brown.
What Are Your Health Club's Next Steps?
Review how you’re currently classifying your employees and compare it to the articles referenced in this article. If you have additional questions, IHRSA recommends contacting a local lawyer.
This update is part of our legal education series. IHRSA wants to keep you updated on changes to the law that could impact how you run your business. So, if you see an email that says legal or legislative alert, be sure to open it.
IHRSA does not lobby on general business issues handled by other organizations.