On September 24, 2019, the U.S. Department of Labor (DOL) announced a final rule updating the earning threshold to exempt executive, administrative, and professional workers from the Fair Labor Standards Act (FLSA) minimum wage and overtime pay requirements.

The final rule, effective January 1, 2020, raises the federal overtime exemption threshold to $35,568 per year ($684 per week) and could affect upwards of 25,000 Hawaii workers.

This is an increase from the current level of $23,660 per year ($455 per week), which was last updated 15 years ago. Though it is slightly higher than the threshold proposed back in March 2019, it is significantly less than the $47,476 per year ($913 per week) threshold that the Obama administration unsuccessfully tried to roll out in 2016.

Under Hawaii state law, employees with a guaranteed pay of $2,000 or more per month are exempt from overtime pay. But once the final rule is effective, the higher salary threshold will take precedence.

Additional provisions under the final rule:

• There are no changes to the duties requirements.
• Nondiscretionary bonuses and incentives payments (including commissions) may be used to satisfy up to 10% of the new salary level requirement.
• The annual salary level for highly compensated employees is being raised from the current level of $100,000 per year to $107,432 per year.
• The final rule does not include automatic increases to the threshold.

What does the new federal overtime rule mean for employers?

If you have an employee who is classified as salary exempt and making under $35,568 a year, you will be required to reclassify that employee as non-exempt and compensate that employee at time-and-a-half overtime pay for any hours worked in excess of 40 hours a week.

“I would strongly encourage employers to begin analyzing their salary exempt workforce now in consideration of the new threshold,” advises HR Specialist Dianne Boasso.

“This will allow time to get a plan in place and communicate any changes to the affected employees which will provide for a smoother transition.”

Read more: Exemptions under the Fair Labor Standards Act

How to comply with the new federal overtime rule

If your business has a significant number of employees affected by the overtime rule change, there are no easy solutions. Some employers may have already instituted wide-reaching operational changes in efforts to accommodate the new rules back in 2016.

This may have included increasing salaries, shifting workers to hourly status, or even laying-off employees to meet cost constraints.

There are some options worth considering as you evaluate how to remain compliant with the new DOL overtime rules.

Raise workers’ salaries above the new threshold

If you have employees consistently working beyond 40 hours a week and these employees are already being compensated at or near the salary threshold, it might be worth considering raising salaries above the $35,568 threshold. However, remember that employees’ duties must still satisfy the duties test as required by the FLSA. In the event of a DOL audit, a current job description will assist in providing documentation to support the exemption.

If it is not within your budget to increase salaries, it will be necessary to reclassify your salary exempt positions to non-exempt.

Pay overtime as necessary

If your employees typically work 40 hours a week and are only occasionally or seasonally required to work overtime, it might be advantageous to reclassify them as non-exempt. In this scenario, you would budget for overtime instead of raising yearly salaries above the threshold.

Limit workers’ hours to 40 hours a week

If possible, redistribute workloads to ensure that non-exempt employees remain within a 40 hour work week. This might be the most cost-effective way of handling the new regulations.

Hire temporary workers

In limiting your non-exempt employees to a 40 hour work week, you may find the need for the occasional temporary worker to meet business demands. Hiring temporary workers can be more cost-effective than raising salaries across the board or paying overtime.

Prepare for communication to affected employees

There are employees who tie professional esteem to being salary exempt. If you determine that paying on an hourly non-exempt basis is more cost-effective for your business, be sensitive to the affected employees when communicating the changes.  Even if there is no change to their income or duties, they may perceive their now non-exempt position to have less professional status.

In Hawaii’s particularly tight labor market, effectively disseminating information to your workforce is important to ensure your employees don’t feel slighted as your business moves to ensure compliance with new regulations.

Penalties for non-compliance under the FLSA

Penalties and sanctions for non-compliance with the FLSA are severe and aren’t a risk worth taking. In addition to the back payment of lost wages to all affected employees, willful violators may be prosecuted criminally and fined up to $10,000 (Source). Employers with repeated violations may be subject to fines of $1,100 per incident. A second conviction of violating the FLSA can even result in imprisonment.

This article is for informational purposes only and does not constitute legal advice. Readers should first consult their attorney, accountant or adviser before acting upon any information in this article.