Department of Labor Issues New Overtime Thresholds
Smit Shah, CPA
11.7.19 | Berdon Industry Insights
Here’s How Hoteliers Can Prepare for the Change Coming January 2020
The Fair Labor Standards Act (FLSA) provides an exemption1 from overtime pay for workers employed as executive, administrative, professional, and outside sales employees (“white-collar employees”) if they meet certain job duties tests, based on the job tasks they perform, and are paid a certain minimum salary. Similarly, highly compensated employees performing office or nonmanual work are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee, and are paid a certain annual compensation. On September 24, 2019, the U.S. Department of Labor (DOL) announced2 a final overtime rule, effective January 1, 2020, that increases the earnings thresholds for these exemptions, for the first time since 2004. Under the new guidelines, the DOL is:
- raising the standard salary level from the currently enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker);
- raising the total annual compensation requirement for highly compensated employees from the currently enforced level of $100,000 per year to $107,432 per year; and
- allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level.
Furthermore, the DOL advises that the final overtime rule “does not include changes to the job duties tests nor is there a provision for automatic adjustments to the salary threshold included.” As such, the white-collar employees will be eligible for overtime pay if they do not meet the duties tests or if they receive less than $684 per week in salary.
This is a significant change in policy from that proposed under the previous U.S. administration. The originally proposed rule would have made 2.8 million workers eligible for overtime pay (i.e., those earning up to $47,000 per year). While workers cheered, business groups criticized the rule as onerous. CEO of the United States Chamber of Commerce Tom Donohue charged that the “added costs would mean fewer opportunities for growth and could even result in a curb on hiring,” and while some employees may gain overtime eligibility, “they are likely to lose hours, health care and retirement benefits, opportunities for advancement, flexible work schedules, and actual income earned.”
To prevent the proposed 2016 rule from taking effect, 21 Republican-led states filed suit to overturn the rule. In 2017, a federal court in Texas invalidated the proposed rule, arguing that the DOL did not have the statutory authority to institute such a change without congressional approval.
The new rule cuts the number of workers eligible for overtime pay to 1.3 million. And while the new rule means wage increases for over a million workers, it has been met with hostility from organized labor.
In New York State (NYS), the minimum salary level for overtime exemption ranges from $885 per week to $1,125 per week on or after December 31, 2019. Since this is higher than the minimum salary level under the new DOL rule, NYS employers will not be significantly affected by the new rule.
Hotel industry groups praised the new rule. The Asian-American Hotel Owners Association, the largest hotel owners association in the world, applauded3 the administration for “updating overtime regulations to create clarity and consistency for employers and employees alike. By raising the overtime eligibility annual salary cap to a reasonable level, the administration expands the number of eligible workers while providing small business owners with an appropriate amount of time to plan for its implementation.”
How Hoteliers Can Stay Ahead of the Curve
Hoteliers have under two months to review and analyze which of their employees meet the applicable job duties test and would therefore be eligible for overtime under the new rule. If hoteliers then decide to keep the eligible employees as exempt, they will need to adjust the salary of such employees to meet the minimum salary level under the new rule. As the DOL guidelines make clear, employers have the option of paying out a bonus to employees to exempt them from overtime, but there is a 10% limit on bonuses and they must be nondiscretionary.
If the hoteliers decide to reclassify eligible employees as nonexempt, hoteliers may then be faced with the need to update their timekeeping and record-keeping policies. This may involve retraining the newly nonexempt employees on how to accurately track their overtime hours.
Adjusting to the new overtime rule can be an expensive process. To offset some of that, hoteliers should identify other areas to cut back on costs, focusing on efficiencies and, if possible, renegotiating contracts with suppliers.
To learn more about the potential impact of the new overtime rule, contact Smit Shah at 212.331.7493 or firstname.lastname@example.org, or your Berdon advisor.
Berdon LLP New York Accountants