Effective Dec. 31, 2018, the minimum salary that employers must pay New York employees to be exempt from overtime under an executive or administrative exemption will increase:

Below are some possible approaches to consider.

While pay raises may be an appropriate response to the new minimum thresholds, employers should carefully consider all of their options before taking action. In some cases, it would not be prudent to simply increase the salaries of all employees currently classified as overtime exempt without evaluating other alternatives to ameliorate the detrimental business impact that a sudden and dramatic increase in labor costs would likely cause.

First, if an employee is slightly below the relevant salary threshold, an increase in salary may be warranted.

Second, for other employees, the company could consider reclassifying exempt employees as salaried-nonexempt. Such employees would be entitled to overtime pay for hours worked over 40 in any given workweek, but the company could prohibit overtime entirely or set strict limits on the amount of overtime hours such employees are permitted to work. To the extent it is not currently doing so, the employer should take steps to ensure that all work time is accurately recorded so that overtime may properly be paid in this scenario.

Notably, under federal law (FLSA), nonexempt employees must receive overtime pay at the rate of 1½ times their regular rate of pay for all hours worked over 40 in a workweek. However, New York State Labor Law only requires an overtime rate of 1½ times the state minimum wage for any overtime hours, regardless of the amount of their regular rate of pay, if the employee is exempt from overtime under the FLSA but still entitled to overtime under New York law solely because of the increased salary threshold. As of Dec. 31, 2018, the New York state minimum wage is as follows:

• $15.00 per hour for businesses in New York City with 11 or more employees;

• $13.50 for businesses in New York City with 10 or fewer employees;

• $12.00 per hour in Nassau, Suffolk and Westchester counties; and

• $11.10 per hour in the remainder of New York state.

Assuming that an employee in New York City meets the FLSA exemption (which currently requires a minimum salary of $455 per week, or $23,660 per year), then for each hour worked over 40 in a given workweek overtime would only be paid at the rate of $22.50, not 1½ times the regular rate of pay. Under this system, employees would be paid overtime for hours worked over 40 in a week, and the company would have the discretion to either prohibit overtime work in its entirety or strictly limit the number of overtime hours that may be worked (with the understanding that employees must still be paid for overtime hours worked if they violate those restrictions). This would potentially result in a lower increase in labor costs than simply raising annual salaries across the board to $58,500, particularly if the company takes appropriate steps to limit overtime hours.

Third, the company could review the exemption status of employees more generally to determine proper classification and, for newly converted salaried, nonexempt employees, evaluate whether any such employees might satisfy the “fluctuating workweek” method of compensation. An employer is permitted to use the “fluctuating workweek” method when each of the following conditions is met:

• There is a clear mutual understanding between the employer and the employee that a stated fixed salary is straight-time compensation for all hours worked each workweek, whatever the number of such hours;

• The employee's hours fluctuate from week to week;

• The employee is actually paid a fixed amount as straight time pay for whatever hours the employee works in a workweek, such that if an employee does not work a full work week due to personal obligations, etc., he/she is still paid a full week's salary, with no deductions for hours not worked;

• The amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage for all hours worked in any workweek; and

• The employee is paid an additional amount for all overtime hours worked (i.e., hours over 40 in any given workweek) at a rate not less than 1/2 the employee's regular hourly rate of pay—such 1/2 rate would vary week-to-week depending upon the number of hours worked by the employee in such week.

Under the “fluctuating workweek” scenario, an employee paid an annual salary of $50,700 would be eligible for overtime for hours worked over 40 in a week at a rate of 50 percent of his regular rate of pay for each overtime hour worked (with the regular rate calculated by dividing the fixed weekly salary by the number of hours worked that week), provided the requirements set forth above are satisfied (which would likely not be the case for all employees). Although there would be an increased administrative burden given that an employee's regular rate of pay (but not fixed base salary) for purposes of calculating overtime may vary on a weekly basis, this approach could result in savings for large employers as compared to a blanket increase in pay for all New York-based employees currently classified as exempt.

Fourth, the company could consider a “Belo” plan, which provides for an exception from overtime pay requirements for certain employees with duties necessitating irregular hours of work. The exception applies if there is a written agreement to provide the employee with a weekly guaranteed salary for no more than 60 hours at a regular rate of pay that is not less than the applicable minimum wage and compensation at not less than one and one-half times the regular rate of pay for all hours worked over 40 in a workweek. This would allow otherwise nonexempt employees to receive the same amount of total compensation each week, regardless of the number of overtime hours worked (up to the maximum number of hours guaranteed in the agreement, which may not exceed 60). However, a Belo plan may be implemented only for employees whose duties require irregular hours of work which the employer cannot reasonably control or anticipate. Thus, the hours should not vary according to a predetermined schedule, or vary from week to week at the discretion of the employer or employee, but rather should change in a way that cannot be controlled or anticipated with any degree of certainty because of the nature of the employee's duties. Irregularities caused by absences for reasons unrelated to the nature of the duties being performed—such as personal reasons, illness, vacations, holidays, or scheduled days off—do not satisfy the requirements for irregular hours of work. Moreover, the hours worked must fluctuate above and below 40 hours per week.

Finally, the company could consider other options such as adding staff so that fewer employees are needed to work overtime hours when they are converted to nonexempt status or lowering base salary and allowing employees to make up the difference through overtime.

Complying with applicable wage and hour laws is critical to the functioning of any business.

Daniel Turinsky is a partner at DLA Piper.