What the New Overtime Threshold of $35,000 Means for Your Business

The U.S. Department of Labor (DOL) has released its highly anticipated proposal to change the minimum salary threshold for overtime eligibility. Placing the new threshold at $35,000 per year (or $679 per week), the proposed regulations would make over a million more workers eligible for overtime pay.

Source: Alex Verrone / shutterstock

What Are the Changes?

• • Up from workers making under $24,000 in annual pay, the recently defined cutoff is less ambitious than the previously proposed $47,000 of 2016, which would have affected over 4 million workers.
  • There are no proposed changes to the duties tests for any exempt workers earning more than the salary threshold, on whether or not they should be classified as nonexempt.

• The “highly compensated employee” (HCE) salary threshold for exemption will be raised to $147,414 from $100,000.
• Unlike the 2016 rule, the new proposal does not mandate automatic periodic adjustments to the salary threshold. Instead, the department is asking the public to assess whether and how the DOL might update the salary threshold requirements every 4 years.

If this proposal takes effect, businesses both large and small will have to contend with some big changes—whether they like it or not. All businesses can prepare themselves by understanding the impacts this proposal will have on employee compensation, corporate policies, and overall business costs:

1. Employee salary and benefits. Employers with overtime-exempt employees making less than $35,000 a year will now have to make a choice: either they reclassify these employees as nonexempt from overtime and track their hours diligently; or raise affected employees’ salary above the new threshold so they remain exempt. And while mandatory benefits tied to state and federal law (such as family and medical leave) will likely remain the same, other benefits, including disability and dental insurance are optional. Take the time to reexamine who is entitled to what, especially employees who have been reclassified.
2. The risk of pay compression. If an employee (or several) already makes close to $35,000, an employer may consider raising his or her salary above the new threshold. While it may seem like a clever tactic, there are several things to consider first. How many employees would require a raise to meet the new standards? After that, will those employees already making $35,000+ also require a raise to maintain equity? The risk of creating tension between employees in this situation is elevated, and it can ultimately affect work, quality, and more.
3. Corporate policies and employee morale. When employers and business owners find ways around new policy complications—such as limiting workers to 8-hour shifts or giving a select few raises to avoid overtime eligibility—it’s important that they consider how this affects employee morale. These strategies are legal but note: Do some employees feel resentful of their new standing? Is it clear that any changes are based on new regulations as opposed to performance? Open and honest communication with everyone—both exempt and nonexempt—will be critical as changes set in.
4. Deskless workers and travel. With deskless workers now comprising 80% of the global workforce, the potential to overlook their time and activities has increased as well. The new overtime pay rules could mean that some employers will need to reconsider their remote-working policies and arrangements to better monitor employee hours or run the risk of real problems down the line.
5. Time tracking systems. Accurately tracking the hours that people work will be more important than ever, as over a million U.S. workers become eligible for overtime. A company still relying on manual processes will unquestionably find itself overwhelmed when making the switch for each individual below the new salary threshold. An automated time tracking system will be a fundamental tool in ensuring these overtime hours are measured correctly.

While the new proposal will undoubtedly be subject to further debate, it is never too early to take these potential impacts into consideration. Employers should use this time to thoroughly evaluate, plan, and execute the appropriate processes and systems so they may be in place when the overtime shockwave affects businesses all over the United States. In the meantime, keep your eyes peeled for more information—and be ready to hit the ground running.

Lakshmi Raj is the Co-Founder & Co-CEO of Replicon. In her position as Co-Chief Executive Officer, Lakshmi is focused on strategic initiatives for Replicon’s global operations, including market share expansion, revenue generation, and worldwide sales activities. She has extensive experience in web-based marketing and was instrumental in providing global visibility for Replicon’s product. Prior to starting Replicon, she worked as a software engineer for Verity (formerly known as FTP Canada). Lakshmi holds degrees in Computer Science and Electrical Engineering.