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Countdown to New Overtime Exemption Rules

If you have not yet done so, now is the time to start preparing all of your accounting and payroll systems for the onset of the Department of Labor’s new overtime exemption rules.

The final regulation changes the salary level that must be met before an employee can be exempt from overtime if they satisfy the “duty requirement,” meaning they have to be engaged in certain “white collar” jobs, like management.

The White House estimates that some 4 million workers who are currently considered “exempt” from overtime pay of time and a half for working more than 40 hours in a week, will now earn that rate for extra time worked if their salaries remain below the new threshold.

But while the rules are generally straightforward, employers in California will have a different standard to meet in the years to come and compliance will become trickier.

Under the DOL’s final rule, starting Dec. 1, employers will be required to pay overtime to full-time employees who earn less than $913 per week ($47,476 per year), regardless of their duties.

This new high threshold, more than double the current $455 per week ($23,660 annually), will be higher than in any states that have their own current thresholds. In such cases, the law that provides the most protection for workers takes precedence.

Currently, the salary threshold for the overtime exemption for white collar workers in California is $41,600 a year, or $3,466.67 per month.

But California’s overtime exemption level is based on twice the state minimum wage, which is set to substantially increase in the coming years, hitting $12 an hour in 2019 and $15 an hour by 2022. After that, it will continue to rise based on a statutory-required formula.

For example, beginning January 1, 2019, when California’s minimum wage hits $12 per hour, the overtime-exempt threshold for California employers will be $49,920. That’s $2,444 higher than the impending federal threshold.

Do the math for 2022, and the California threshold will hit $62,400.

The federal minimum salary threshold will also be automatically updated – every three years. The first update will be in 2020, and a White House projection has figured that the salary threshold will rise to $51,000 at that time.

Duties test

California also has a different duties test than that of the Fair Labor Standards Act (FLSA).

The federal duties test for white collar exemptions requires exempt employees to be “primarily engaged” in certain duties, like managing people and making decisions independently. In California, an exempt employee must spend more than half of his or her time engaged in exempt work.

Get current now

With the new rule about to take effect, it is imperative that you get all of your systems and procedures in place before the change.

Here is a checklist of action items that you should address immediately:

  • Check whether your salaried employees satisfy the duties and salaries components of the FLSA White Collar Exemptions (or your state law).
  • Identify all of the positions that will require reclassification under the new rule and decide whether it is worth it to increase someone’s salary.
  • Analyze the financial impact of reclassifying employees as nonexempt.
  • Consider reassigning certain tasks to reduce the effects of the rule.
  • Make plans to conduct reviews regularly – like every three years for federal law compliance or more frequently in some states, like California ahead of minimum wage changes.

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