New Minimum Salary for Exempt Employees as of 1/1/2020: How to Minimize the Impact

Effective January 1, 2020, the federal government is raising the minimum salary requirement for exempt positions from $455 to $684. That translates to thousands of extra payroll dollars ($11,908 annually) for companies like retail, dry cleaners, restaurants, cleaning companies and lots of other businesses with traditionally lower wages.

This change does not mean that anyone making $684 per week will be exempt from overtime. Salary is only one part of the requirements for exempt status. The duties tests remain intact.

There are options for reducing the impact of the new overtime rule. One solution is to re-structure the formerly exempt employee’s pay so that the new pay with overtime approximates what he was making previously without the overtime pay. Non-exempt employees may be paid on a salary basis, but they are still entitled to overtime for hours over 40. To re-structure the pay, the employer and employee must agree in advance on a given salary that will cover a certain number of hours. Then, any hours worked over 40 would require a payment of “half-time”, since the all the straight time would have already been paid. For example, if the usual schedule is 45 to 50 hours per week, the agreement may be that $500 will cover all the straight time up to 50 hours per week. Each hour worked over 40 would pay an additional ½ of the “regular rate”. The regular rate must be calculated weekly, using all earnings for the week divided by all hours worked that week. So, the regular rate may fluctuate from week to week. Using our $500 example, the regular rate for a 42 hour week is $11.90, but the regular rate for a 49 hour week is $10.20. So, if the employee worked 45 hours in a week, the overtime calculation would be:

$500 divided by 45 hours= $11.11 for the regular rate. The employee would be entitled to 5 hours of overtime at : ($11.11*.5) times the 5 hours = $27.78. That amount plus the regular salary of $500 would amount to $527.78. This arrangement works well with fluctuating work week hours. The key, of course, is to make the salary arrangement in writing, in advance, with the employee.

A second option is to calculate an hourly rate that will be equal to what the employee made previously as an exempt employee, but now including the overtime. This method works best with standard workweeks. To use this method we need a bit of algebra. As an example, if an employee makes a current salary of $585 per week and regularly works 45 hours per week, then he has a regular rate of $13 per hour. We would need to lower that hourly rate to an amount that, with 5 hours of overtime each week, would equal the current wage of $585 per week.

$585 = 40x +5 (1.5x)
$585 = 40x + 7.5x
$585 = 47.5x
X= $12.315

40 hours times $12.315 = $492.60
5 hours times $ 18.48 = $ 92.40 ($12.315 x 1.5)
Total of $492.60 plus $18.48 = $585.00.

In the event that the employee works less than the usual 45 hours, his pay would be less than $585; if he works more than 45 hours, his pay will be more than $585.

These solutions are allowed according to the code of federal regulations. However, if there is any sort of contract, whether written or implied, with the employee regarding his compensation, then the employer’s ability to change the compensation may be limited. A thorough review of the employee handbook and a consultation with the employer’s attorney is recommended before implementing any changes to pay.

Aside from the legalities, there is the consideration of the “psychological contract” between employee and employer. The employee expects fair and ethical treatment by the employer in return for his work. Although the overtime solutions presented here are legal, they may be perceived as unfair by employees who are expecting to earn more money when the new law is passed. As with any business decision, all factors should be considered before making a final determination.