The Department of Labor has announced the new minimum salary for certain exempt white collar employees, effective January 1, 2020.
Exempt Executive, Administrative, Professional and Computer Employees (EAP)
As of January 1, 2020, salaried exempt EAP employees must be paid at least $684 per week on a salary basis, or the equivalent of $35,568 per year. The new rate is a substantial raise from the previous rate of $455 a week ($23,660 per year). The Department estimates that 1.2 million additional workers will be entitled to minimum wage and overtime pay as a result of this change.
Up to 10% of this minimum may come from non-discretionary bonuses, incentive payments, and commissions (collectively, “incentive pay”), so long as these payments are received on at least an annual basis. If an employee does not earn enough incentive pay to meet the minimum by the end of the year, the employer has two options: pay the difference with a “catch-up” payment within one pay period after the end of the 52-week year or retroactively remove the exemption and pay the employee for any overtime worked during that same year.
Teachers, practicing lawyers, practicing doctors, and outside salespeople are exempt from these minimums under federal law, though may be subject to state minimums.
Exempt Highly Compensated Employees (HCE)
The HCE exemption is intended for employees who don’t quite qualify for the EAP exemptions due to their job duties, but who happen to be paid extremely well. This exemption is used much less commonly than the others and most exempt employees will fall under the EAP exemptions.
Employees classified as exempt under the HCE exemption must make at least $107,432 per year. Of that amount, at least $684 per week must be paid on a salary or fee basis, with no reduction for future incentive pay. The remainder of their income, however—nearly 67% if they make $107,432—may come from incentive pay. If the employee does not earn enough in incentive pay to meet the minimum by the end of the year, the employer has the same two options as with EAP employees. They can make a catch-up payment (in this case within one month) or retroactively remove the exemption and pay the employee for any overtime worked during the previous year.
What to do next
The Society for Human Resource Management (SHRM) said employers should review their payroll to see what changes they may need to make. Employers will need to evaluate anyone they currently classify as exempt from overtime and pay less than $684 per week or $35,568 per year. Businesses will need to determine whether it makes sense to raise the salaries of employees who will now fall into the “overtime category” so they can be treated as exempt, or whether it is better to leave them where they are and pay overtime as necessary. (Of course, to be exempt, employees still need to pass the duties tests.)
The SHRM also suggests strongly communicating with employees who had been exempt and are now nonexempt. Some may see this as a de facto demotion, so managers should reassure them the change is due to government regulation, not to the company’s opinion of their work. At many companies, large numbers of employees will need to be trained in keeping track of and reporting their time.
As January 2020 approaches, you may have questions. HR support on federal and state laws alerts is available to you through one of our HR Solutions at Payroll Management. Learn More.