In a surprise move, a federal judge in Texas put the brakes on the Department of Labor’s new federal overtime rule, which was scheduled to take effect on Dec. 1. For now, employers may follow the existing overtime rule. For more, click here
The Department of Labor (DOL) has issued final rules that will substantially increase the minimum salary requirement to be exempt from overtime under the Fair Labor Standards Act (FLSA). The final rules are effective December 1, 2016. Here is an overview of the new rules and guidelines to help you prepare.
The FLSA requires covered employers to pay “non-exempt” employees at least the minimum wage for each hour worked as well as overtime pay for all hours worked in excess of 40 in a workweek.
While most employees are “non-exempt,” the FLSA provides for exemptions from its minimum wage and overtime requirements for certain administrative, professional, executive, outside sales, and computer professional employees. These employees are known as “exempt” employees. To be considered “exempt,” employees must generally satisfy all of these three tests:
- Salary-level test: Employees must earn a weekly salary that meets the minimum requirements. Until December 1, 2016, the minimum salary requirement is $455 per week for the administrative, professional (including the salaried computer professional), and executive exemptions.
- Salary-basis test: With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test: The employee’s primary job duties must meet certain criteria.
There is also an exemption for “highly compensated” employees who customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee. Until December 1, 2016, these employees must receive total annual compensation of at least $100,000 to qualify for this exemption.
What Is Changing?
Here is a summary of the final rules, effective December 1, 2016:
- Salary increase for certain exemptions. The minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions increases from $455 per week to $913 per week($47,476 annually).
- Increase for highly compensated employees. The minimum total compensation required for the highly compensated employee exemption will increase to $134,004 per year, which must include at least $913 per week paid on a salary basis.
- Automatic updates. There will be automatic adjustments to these minimum salary requirements every three years.
- A portion of certain bonuses count. For the first time, employers may use nondiscretionary bonuses (generally defined as those announced or promised in advance), incentive payments, and commissions, to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly.
Note: The DOL made no changes to the duties tests for the administrative, professional, executive, highly compensated, computer professional, or outside sales exemptions.
Potential Impact on Exempt Employees:
If your exempt employees earn less than the new salary requirement, they will no longer meet exemption criteria and must be classified as non-exempt and paid overtime whenever they work more than 40 hours in a workweek. An employee who meets all applicable exemption criteria, including the new minimum salary requirement, salary-basis test, and applicable duties test, may continue to be classified as exempt.
Options for Compliance:
If your exempt employees’ salaries fall below the new minimum, you will generally either have to:
- Raise their salaries to the new requirement (if you elect this option, review employees’ job duties to ensure they continue to qualify for the applicable exemption); or
- Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.
These options are discussed in greater detail below.
Option 1: Raising Salaries
If an employee’s salary is closer to the current minimum ($23,660) and they rarely work overtime, it might make sense to reclassify them as non-exempt. To determine the cost of raising an employee’s salary to the new minimum, simply subtract the employee’s current salary from the new minimum ($47,476).
Note: If you provide your exempt employees with nondiscretionary bonuses, incentive payments or commissions, make sure you factor this in when calculating the potential costs of raising their salaries to meet the new requirement (10 percent of these payments can be used to meet the minimum salary threshold).
Also remember that with the automatic increases, you would need to review and adjust (if necessary) exempt employees’ salaries every three years. If you currently offer regular merit increases, you will need to decide how you will handle those going forward in light of the automatic adjustments.
Option 2: Reclassifying Employees
If exempt employees don’t meet the new salary requirement, you can reclassify them as non-exempt and pay them overtime (1.5 times their regular rate of pay) whenever they work more than 40 hours in a workweek. If your employees rarely work more than 40 hours in a week, you could reclassify them as non-exempt and convert their salary to an hourly wage (divide their weekly salary by 40 hours).
If your employees regularly work more than 40 hours per week, simply converting their salary to an hourly wage would result in a significant increase in costs. However, assuming you have an accurate picture of the hours they work, you could keep your costs the same by accounting for the overtime premium in their new hourly wage. To take this cost-neutral approach, here is a simple formula you can use:
Weekly Salary / [40 hours + (Overtime Hours Worked Per Week x1.5)]
Here’s an example:
An exempt employee’s current salary is $715 per week, the employee regularly works 50 hours per week, and you want to convert this employee to an hourly employee but keep your costs the same. You would calculate the hourly wage as follows:
$715 weekly salary / [40 hours + (10 overtime hours x 1.5)] = $13 hourly rate.
This employee would be paid $13 per hour for the first 40 hours and $19.50 per hour ($13 x 1.5) for each hour of overtime. Remember, whatever hourly rate you decide to pay reclassified employees, it must meet or exceed the highest applicable minimum wage (federal, state, or local).
Notify Employees and Payroll Providers of the Changes:
Make sure to inform your employees of the changes and give them a reasonable amount of time to prepare for the change.
Once you have finalized your option for compliance, make sure to inform your payroll provider of the changes you are making to any employees.
For more information you can read DOL guidance on the new rules here.