On January 1, 2020, a number of new pay rules will become effective. While these changes may not directly impact many employees, they could cause pay compression under many compensation plans. Pay compression issues trigger employee morale issues, and adapting to those issues may mean that more than just those at the bottom of pay scales will need to have their pay adjusted. This ripple effect, of course, could be costly. Further, if the employees are covered by union contracts, how these new rates are rolled in, and whether pay compression concerns may be addressed, are mandatory subjects of bargaining. While a union contract cannot violate the law, the effects triggered by compliance are subjects of bargaining.

The following will briefly summarize what employers should be aware of and address in some form:

Federal law changes

  • The salary level for most exempt executive, administrative and professional employees under the Fair Labor Standards Act (“FLSA”) will increase from $455 per week (or $23,660 per year) to $684 per week (or $35,568 per year). Thus, unless currently exempt employees paid below this new threshold are given salary increases, they will lose their FLSA exempt status.
  • Some employees meet the FLSA’s exemption test if they are “highly compensated” and meet at least one of the duties criteria for being considered an exempt executive, administrative or professional employee. The current pay rules for these employees require that they receive at least $455 per week on a salary or fee basis andreceive at least $100,000 on a non-discretionary basis. The rule, though, allows a short window to catch-up the pay to meet the $100,000 threshold if the employee falls short of the expected $100,000+ annual pay.On January 1, 2020, the new pay amounts applicable to these employees will be:- $684 per week to be paid on a salary or fee basis, and - Total compensation for the year must be at least $107,432
  • Employers should consider conducting an FLSA compliance audit to review their exempted classifications, as well as their time and attendance practices and pay practices, which could avoid or greatly reduce employer liability should they be found to have somehow—even inadvertently—violated the Act.

State law changes

In addition to complying with Federal law, employers must also comply with the minimum wage and overtime requirements under state law.

  1. Many states have more stringent requirements for employees to be exempt from overtime than the FLSA, and the rules of whichever law is more favorable to employees will apply. A number of states have higher salary level thresholds for exempt status than those under the FLSA. Employees in those states must be paid per those state thresholds in order for them to considered exempt under state law.
  2. On January 1, 2020, the minimum wages in many states will increase, and many states have minimum wages greater than the $7.25 per hour Federal minimum wage. As with overtime rules, whichever law mandates the higher minimum rate, that higher rate will apply. Among the states increasing their regular minimum wage rates on January 1 are:- California (from $12.00 to $13.00 per hour);- Illinois (from $8.25 to $9.25 per hour); - Maryland (from $10.10 to $11.00 per hour); - Michigan (from $9.45 to 9.65 per hour); and- Minnesota (from $9.86 to $10.00 per hour).
  3. Employers should also be aware some local units of government have their own minimum and living wage requirements. In these local jurisdictions, the higher minimum wage will apply.

Next Steps: What should employers do?

Employers should evaluate whether they are in compliance with these new legal requirements by conducting an internal audit and, if an audit finds any areas of non-compliance, employers should make any necessary changes to their pay policies and practices. As mentioned above, as employers adjust to these changes, any audit should be conducted so as to survive judicial scrutiny if the pay program is ever challenged, particularly under federal law. Under federal law, employers can assert a “good faith” defense to an FLSA claim, and if successful, they may be able to avoid assessments of liquidated damages, damages that are usually an amount equal to the amount of unpaid wages or overtime at issue. To successfully assert this defense, courts usually expect employers to have their audits conducted a reputable wage and hour attorneys or sophisticated consultants.