Is your employee exempt or non-exempt? | Overtime pay implications

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Let's explore the four overtime rule changes. The first thing to note is that these will take effect on January 1st, 2020, and the four changes are summarized as follows. There is an increase to the minimum salary requirement, an increase to what is defined as a highly compensated employee, a new bonus and incentive limit component for the salary, and finally, revised special salary levels.

Now let's go into the details of each one of these. The first rule, around the minimum salary. The minimum salary for exempt employees is increasing to $684 per week, or $35,568 per year. Now this is up from $455 per week, or $23,660 per year. Quite a big bump.

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The second change is around highly compensated employees. The total annual compensation for highly compensated employees is increasing to $107,432 per year. Now if you want to know what the highly compensated employee is, I'm going to talk about that a little bit later.

The third change is around bonus and incentive limits. Employers can use non-discretionary bonuses and incentive payments for up to ten percent of the salary level. So you could have a lower base salary for your employees, and then have an annual bonus that makes up for the additional ten percent.

Finally, there are some revised special salary levels that relate to US territories as well as the motion picture industry. As you can see, the territories have lower thresholds and the motion picture industry has higher thresholds.

2:24 What exempt classification means

So if none of this made a lot of sense, let me dive into the whole exempt definition.

So let's give a little background on the exempt classification. The exempt classification is focused on non manual white-collar work and qualifies in three ways, and they have to be all three ways.

The first is that employee has to be paid in a fixed salary, so you have to have a standard base salary. They have to meet the minimum amount. Now as I mentioned around the rule change, that amount has gone up in 2020. The final element, and this is the one that most companies abuse if they abuse anything, which is the duties test. So their work has to meet a duties test based on the different job role that they're in.

3:09 The duties test

Now the Department of Labor has rules for each one of these roles. Let me just give you an example of the professional duties. So the professional duties, and I'm gonna have put up here the language from the Department of Labor, but I'll translate it.

So the first one is, this professional, they're doing intellectual work, they're having to exercise discretion and judgment, so something you would expect from a knowledge worker. This work is in a field of science or learning. Learning could be something like a professional such as an accountant, like we are at LedgerGurus, we do accounting services. And the advanced knowledge must be customarily acquired by prolonged course of specialized intellectual instruction, also known as a lot of college or study.

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So let me give you an example. As I mentioned, we are a professional business. We have many accounting professionals. Some of our professionals, they are doing work that requires discretion and judgment, they are doing a field of knowledge in the accounting profession, and it has required a prolonged course of specialized instructions. So some of our work requires CPAs or CPA equivalent education. Those individuals would qualify.

Now we have other individuals or bookkeepers that may be doing more routine work that doesn't require as much discretion and judgment. They would not qualify.

If you want to see all of the duties tests, you can go to this URL for the Department of Labor. One thing I will note is you may want to talk to a labor lawyer if you have questions around certain employees. That would not be, yes we can help you with the accounting around this employees, but we're probably not the best ones to tell you whether they meet the duties tests.

5:00 Highly compensated employees

Now there's an additional exemption, which is the highly compensated employees. These are employees doing office or non-manual work, paid over $107,432, and they perform at least one of the duties in one of these categories.

Now let me take my example of a bookkeeper. Let's say my bookkeeper is doing work requiring accounting knowledge and I'm paying a lot, but they don't have the education, maybe they're not doing the requiring the amount of discretion. I could treat them as a highly compensated employee, [unclear], and I have to pay overtime.

Now I will tell you, if you are paying this much money for a bookkeeper, you should talk to LedgerGurus, because we could probably do it for a lot cheaper.

5:49 Overtime obligations

Now for those that are not exempt, what are your overtime obligations? Well, any non-exempt employees must be paid at least 1.5 times their regular pay, time and a half as it's commonly known, for any hours over 40 in a workweek. And a workweek can be [unclear], it must be constant. So you could have your work week be Monday to Sunday, Wednesday to Thursday. It could be Wednesday at noon to the following week at Wednesday at noon. As long as you're consistent, you can define your work week however you want to.

6:21 Misclassification consequences

Let's talk about misclassification consequences for any of those of you that are tempted to classify your employees the wrong way.

Now I'm not a lawyer. We don't have a lot of experience working with companies who have encountered this, but I can speak from research and understanding the regulations.

Essentially, think about it this way. If you classify a non-exempt employee as an exempt employee and didn't pay their overtime, you have an obligation to them first, in that you did not pay them that time and a half that they were due. Secondly, you have an obligation to the government. So think about it, there are [unclear] taxes that were not paid, along with that can come penalties, fees, back interest that you owe.

And so it's a bad idea to try and play this game. It only takes one complaint by an employee to bring an avalanche of financial obligation, not to mention other criminal penalties that might be associated with something like that. So don't do it. Classify your employees right.

7:21 Next steps for employers

Now finally, let's talk about next steps if you're an employer.

First I would say review all of your exempt employees to see if they meet the new salary limits. For anyone that is under the limit, you have two options. Number one, give them a raise. Number two, change them to non-exempt and begin tracking their time and paying overtime when applicable. This can be a complicated decision for people that are on the edge of the classification, and so you have to probably make a good financial decision on what makes the most sense.

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