Employers have two choices to make when classifying employees for purposes of entitlement to overtime: they are either (1) exempt (no overtime) or (2) non-exempt (entitled to overtime). Employers who classify employees as exempt can only justify that classification by establishing that (a) the employee is paid a predetermined salary of at least $455 per week (the “salary test”) and (b) the employee performs a certain type of duties (the “duties test”).

The duties test is complicated and generally involves determining whether the duties performed by the employee fall into the executive exemption, the administrative exemption, the learned professional exemption, and/or the creative professional exemption. You can read more about these exemptions here.

The salary test isn’t complicated. The employee must be paid a predetermined salary of at least $23,660 per year. Simple right? Sure, except for the fact that the Department of Labor is proposing that the amount be increased to $35,308 per year effective January 2020. The same regulation also contains a commitment to proposing increases to the earning threshold every four years.

Sound familiar? It should, as this is the exact same type of change proposed by President Obama in 2015, although he proposed an increase in the salary basis to $47,476 per year. A court in Texas eventually enjoined the enforcement of that proposal.

What does that mean? Well, say an employee makes $25,000 a year, works 50 hours a week, and is properly not paid overtime pursuant to one or more duties tests. That’s perfectly fine until January 2020. As of January 2020, that employee is entitled to $18.00/hour for every hour worked over 40 in a workweek, for a total of $180.00 of overtime per week. Employers who get that wrong and are sued will not only be on the hook for that $180.00, they will also be subjected to triple damages, interest, costs, and will be required to pay the employee’s attorneys’ fees.

Don’t panic. The law won’t take effect until January 2020. But employers should start giving thought relatively soon as to how to prepare for this change, including:

• Increasing base salaries for exempt employees who are paid less than $35,308 in order to preserve the exemption;

• Hiring employees to avoid the number of overtime hours worked by exempt employees; and

• Reclassifying exempt employees that make less than $35,308 per year as non-exempt.

Do you have questions about how the proposed change to the “salary test” will impact you? Contact us today.

UPDATE: On September 24, 2019, the DOL announced that on January 1, 2020 the annual salary threshold will be raised to $35,568. Read more here.