Human resources matters are nothing if not dynamic. With the new year comes new changes to how employees are compensated. Updates to The Fair Labor Standards Act (FLSA), a federal law–which establishes minimum wage and overtime pay eligibility–take effect on January 1, 2020. The new law applies mostly to so called white collar salaries, including executive, administrative, and professional positions. At a high level, the changes to FLSA determine the compensation structure for exempt (not entitled to overtime pay) and non-exempt (entitled to overtime pay) employees. But there’s a lot more to it.
Effect on Overtime Pay
According to the Society of Human Resources Management (SHRM), more than one million workers will receive extended overtime protections who are not currently eligible. Specifically, non-exempt employees must receive, “…at least time and one-half their regular pay rate for all hours worked over 40 in a workweek.”
Per SHRM, elements of the new law, among others, include:
- Workers who do not earn at least $35,568 a year ($684 a week) would have to be paid overtime, even if they’re classified as a manager or professional.
- Nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level.
- The special rule for highly compensated employees would require workers to earn a total annual compensation of at least $107,432 ($684 of which must be paid weekly on a salary or fee basis).
Challenges Facing Employers
So what’s the big deal? All employers have to do is increase salaries or change their employees’ statuses to non-exempt. If only it were that easy. Employers that attempt to adjust and adapt can find themselves in a messy situation.
“The decisions not only impact the affected employees, but also affect the employers’ budgets and compensation structures, potentially creating unwanted salary compressions or forcing employers to adjust the salaries of other employees,” notes The National Law Review.
Additionally, the decision to change employees to non-exempt status can have a powerful ripple effect. New hourly rates need to be created with the unintended consequences of unexpected increases or decreases in compensation. This can actually result in a salaried employee becoming hourly, which can feel like a demotion. Employers will need to be prepared to address how their employees will react to this news.
Challenges Facing Employees
Employers don’t have to worry about exempt employees (those earning at least $35,568), provided their compensation meets the new minimum salaries. Not so fast. While these employees are staying put, the changes occurring around them may not sit well. Say a business owner needs to pivot to be FLSA-compliant by converting a non-exempt employee to exempt status. That employee may suddenly be making more than an exempt co-worker since only compensation was addressed. Then there’s the issue of salary modifications regarding employees in protected categories. Per the National Law Review:
“A female senior manager who is now being paid only several hundred dollars per year more than the lower-level male manager might well raise a concern about gender discrimination if her salary is not also adjusted.”
What is the Impact on Illinois?
The new salary thresholds are mandated by federal law, but individual state and local wage-hour laws may have different criteria. Employers in Illinois must abide by FLSA and the Illinois Minimum Wage Law to determine exempt and non-exempt employee status. Information on this, including salary and hourly tests, can be found by visiting the FLSA Exemptions page on the Illinois Department of Labor website.