A lot of white-collar workers in Arizona are going to make more money next year and they won’t even have to endure a performance review to get that green thanks to new overtime rules.

“The U.S. Department of Labor’s final rule updating overtime pay goes into effect on January 1, 2020, and makes some seemingly small changes that will affect a lot of employees,” says Dylan Wright, an associate at Radix Law.

Jill Chasson, an attorney at Coppersmith Brockelman, explains what the new overtime rule actually says.

“This rule is the first update to overtime regulations in 15 years after an earlier attempt during the Obama administration was blocked in the courts,” Chasson says. “It sets a new salary threshold of $684 per week, or $35,568 per year, for executive, administrative and professional employees who are classified as exempt from the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). These are typically called ‘white-collar’ exemptions.”

In addition, Chasson says:

• The new rule also increased the salary threshold for highly compensated employees, from $100,000 to $107,432 per year, and allows employers to use bonuses or commission to satisfy up to 10 percent of the salary requirement for white-collar exemptions, but not for highly compensated employees.

• Exempt employees must still satisfy a duties test to meet the exemption requirements. The new rule does not change the current criteria for any of the duties tests.

Feeling the pinch of overtime rules

“The rule will most impact those line-level managers and assistant managers who, while filling a very important role, often do not make significantly more than the hourly employees they supervise,” says Lindsay M. Schafer, an attorney at Quarles & Brady, “particularly now that the minimum wage has been increased in Arizona.”

But experts say some business sectors will feel the increased labor costs more than others.

“The new overtime rule will only affect currently exempt white-collar workers making between $23,660 and $35,568 annually,” says Tracy A. Miller, a shareholder at Ogletree, Deakins, Nash, Smoak & Stewart. “Those who meet these criteria are generally in the nonprofit, retail, or hospitality industries in rural areas. The Department of Labor estimates that 1.3 million workers will be affected, but I believe this number is overstated. The estimate makes a couple of unrealistic assumptions. Additionally, workers in this salary range who do not regularly work overtime could be negatively impacted if they are converted to hourly employees.”

While many business owners and executives might feel frustrated by this increase in labor costs, consider this: It could have been worse. The rule going into effect Jan. 1 pales in comparison with a 2016 proposal that nearly doubled the salary threshold to $913 per week (or $47,476 per year) and included automatic increases to the minimum salary every three years.

“The new rule is a compromise, a win for employers that is a significant departure from the rule the Obama administration had proposed, which would have had businesses paying 33 percent more per week to exempt employees at the minimum salary threshold,” says Gregory W. Seibt, partner at Blythe Grace. “While there will still be an economic impact, the industries that will feel it most are likely to be in retail and manufacturing and the like, where workers’ annual salaries are less than $35,568 … In sum, the new rule will require businesses whose employees make less than $684 per workweek to decide between giving those employees a raise to at least $684 per week or paying them overtime.”

Impact on business

In addition to allowing employers to use non-discretionary bonuses and incentive payments to satisfy up to 10 percent of the salary threshold for exempt employees, the DOL will also allow employers to make catch-up payments to employees who do not earn enough in non-discretionary bonuses or incentive payments in a given 52-week period to retain exempt status, provided that the catch-up payment is made within one pay period of the end of the year.

“Employers should note that the changes in these regulations, while disruptive, provide an excellent opportunity to investigate and resolve any lingering questions related to employee exemption status without raising a red flag,” Schafer says.

Accordingly, Schafer says employers should use this time to evaluate positions that are close to the salary threshold, and any other positions that may be in question, prior to January 1, 2020. Before next year, she says employers should either increase pay to the threshold requirement or reclassify employees, taking care to develop a strong communications plan explaining the reasons for any changes that will be made.

“It’s important to know whether the FLSA’s overtime rules apply to you,” Wright says. “Know whether you have employees who fall under the new limits for overtime exemption. Simply paying salaries on an annual basis does not avoid otherwise valid overtime obligations. You need to take a fine-grained look at who might become eligible on January 1, 2020.”

Wright says if you already have non-exempt employees, be sure to work with your human resources personnel to bring your newly-eligible employees up to speed on your company’s overtime policies and procedures. If you don’t have any overtime policies in place, now might be the time to consult with a human resources specialist or employment attorney to make sure you’re compliant with applicable FLSA rules.

“Businesses should look at the rule change as a good opportunity to review their exempt classifications,” Miller says. “If you are treating a worker making less than $35,568 annually as exempt, there is a decent chance this worker is misclassified based on the duties test. Even if your business is not affected by the rule change — and most will not be — you may find that you have misclassified workers. Now is a good time to correct those mistakes.”

Preparing for change

This is how business owners and executives can best prepare for implementation of the new overtime rule, according to Jill Chasson, attorney at Coppersmith Brockelman:

• Employers should review compensation for all exempt employees to determine who is currently being paid less than the new minimum salary. This is also a good time to evaluate whether exempt employees are properly classified, and to identify any pay disparities among similar employees that should be addressed.

• Some employers may choose to comply by increasing certain employees’ pay to above the salary threshold. It is important to note that doing so may cause a ripple effect of pay raises across the company, depending on whether the company has an integrated compensation system.

• If the employer chooses to reclassify certain employees as non-exempt, they should consider transitioning these employees to hourly pay in order to better track and calculate overtime. Employers also will want to take steps to ensure that newly non-exempt employees track their work hours properly and follow the company’s timekeeping policies and practices.