The US Department of Labor is proposing a new rule to raise the salary threshold for overtime exemption, which would have a significant impact on employers’ budgets and employees’ salaries.
The general rule is that when an employee works more than 40 hours in a week, the employer has to pay “time and a half” for those hours over 40. There are exceptions to that overtime requirement for certain classifications of employees who earn salaries of $455 or more per week ($23,660 for the year).
However, the US Department of Labor (DOL) is now proposing to raise the salary level for overtime exemption. Under the new rule, an employer may have to pay overtime to any employee who doesn’t earn a salary of at least $679 per week ($35,308 per year).
Employers should weigh their options in anticipation of this rule change. One option is to continue an employee’s pay at the same level and simply convert it to an hourly rate. But be aware that any overtime hours must then be compensated at time and a half– as we’ll examine below, this could have a significant impact.
Let’s break it down:
- $455 per week works out to about $11.38 per hour, assuming a 40 hour week.
- Time and a half for $11.38 per hour is $17.07
- So if an employee works a 50 hour week, he or she will earn about $625 for the week.
- Note: the DOL-proposed salary for overtime exempt employees is only $54 per week more.
- So if an employee works a 60 hour week (certainly not unheard of), then he or she will earn $796 for the week– well above the overtime-exempt threshold.
As you can see, the above approach could cost even more than it already does. Slashing pay rates may be a cost-neutral solution, but what effect will that have on employee morale and recruiting and retaining top talent?
Alternatively, an employer could raise an employee’s salary level to the threshold and then would not be required to pay overtime. Obviously, this approach also has significant ramifications for a business’s budget.
In any event, it is wise to consider these changes before they take affect, rather than scrambling to beat the shot clock.
Oh, and speaking of salary rules…
Didn’t we already go through this whole debate? In fact, we did! The Obama-era DOL implemented a much higher salary level in 2016–$913 per week (or $47,476 per year). However, many states and businesses joined in a federal lawsuit that ultimately resulted in the rule getting blocked before it was ever implemented.
The moral of the story is stay tuned, but be prepared.