If you have salaried (exempt) workers, your business will likely be impacted by the new Department of Labor (DOL) regulations. The DOL has announced the final changes to the Fair Labor Standards Act (FLSA) for exempt employees not eligible for overtime. These new regulations will be effective December 1, 2016, and will dramatically increase the number of employees that will be eligible for overtime. The regulations have changed the white collar exemptions for executive, administrative, and professional workers by increasing the minimum salary; and increasing the salary for the highly compensated exemption.
Currently, to be exempt from overtime pay an employee must qualify for one of the white collar exemptions. To qualify, an employee must pass three tests:
1. Salary Basis Test: employee receives a fixed salary each week that is not subject to reduction because of variations in the quality or quantity of work.
2. Minimum Salary Test: employee receives a minimum salary- currently at $23,660 (increasing to $47,476) and $100,000 (increasing to $134,004) for the Highly Compensated Exemption.
3. Job Duties Test: employee performs work that primarily involves certain executive, administrative, or professional duties.
What Has Changed?
New Minimum Salary Test
Effective December 1, 2016, the minimum salary for any exempt employee will be $47,476.00 annually ($913 week). Any current salaried exempt employee making less than the minimum salary will either need to be:
1. Converted to an hourly (non-exempt) employee, their hours tracked and then they must be paid overtime for hours worked over 40. (Overtime regulations vary by state; check with your HR Rep); OR
2. Be increased to the minimum salary provided they meet the other exemption tests described above.
What compensation is included in the $47,476 minimum salary? Not all compensation paid to the employee can be included in the annual minimum salary. Non-discretionary bonuses, incentive pay, and commissions can be included in the minimum salary pay up to 10% of the employee’s regular pay. These payments must be paid on a quarterly basis, or more frequent. The new regulations do allow for a catch up payment each quarter, paid within one pay period after the quarter ends. Examples of compensation not included in the minimum salary are fringe benefit payments, lodging, and employer retirement contributions.
The minimum salary amount will be automatically updated every three years beginning January 1, 2020. The Department of Labor will post the new salary levels 150 days in advance of the effective date, beginning August 1, 2019.
Increased Salary for Highly Compensated Exemption
The new salary for the Highly Compensated exemption will be $134,004 (up from $100K currently). This salary threshold will be automatically updated every three years beginning January 1, 2020.
Additionally, the highly compensated employee must now also satisfy the minimum weekly pay of $913. Some review may be needed for any employee that currently meets this exemption, to ensure the increased weekly pay is also satisfied.
Job Duties Test
The final rule does not make any changes to the “duties test” for any of the white collar exemptions. Currently, an employee’s classification as either exempt or non-exempt depends not just on salary, but also on the general character of the job duties as a whole. Employees that meet both the duties test and minimum salary test are not entitled to overtime pay.
Preparing for the Changes
Your HR Representative is prepared to help you review your employee classifications and can assist you with developing job descriptions if needed for positions needing further review of the job duties test. As part of the planning process, your HR Rep will work with you to develop the following:
- Identify all current exempt employees and determine any positions that warrant further scrutiny of the job duties test.
- This is the perfect time to move any questionable positions to non-exempt if their job duties don’t clearly meet the Executive, Administrative, or Professional exemptions.
- Identify Exempt Employees making less than $47,476 annually.
- Transition these employees to hourly non-exempt, and have the employee track their hours and be paid overtime; or, increase their salary to the minimum salary if more cost effective.
- Think about the actual hours they are working each week, and do the cost calculation of both scenarios. Keep in mind they must still satisfy the job duties test along with the minimum salary.
- Identify a list of employees that must be changed.
- Work with your HR Rep to create a communication plan and resources for employees.
- Review existing time keeping practice for other hourly employees, and outline the process for the employees that will be converting. Non-exempt must record the actual time work begins, lunch breaks, and the time their day ends. This will require extra communication, as exempt employees are not used to tracking their time and may be resistant or perceive the change as a demotion.
- If you have a lot of employees you need to convert, consider implementing a time and attendance software solution to make tracking time more efficient. Talk to your HR rep for low cost solutions we can offer.
- Train managers to understand the timekeeping policies and practices, so they can help monitor the hours worked each week. They are the front line for limiting overtime expense.
- Special attention should be paid to prior tasks the employee performed outside the normal work day such as checking emails, answering work cell phones, etc. Off the clock time expectations need to be set for both employees and managers and the approval process for overtime clearly outlined.
- Execute communication plan and submit status change forms to Payroll as necessary to be compliant by December 1, 2016.
- Other strategies might include reducing or eliminating overtime by making staffing adjustments. An employer might also reduce the amount of pay allocated to the base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked each week.
DOL estimates that 80% of businesses are not in compliance with current FLSA. With increased audits and education of employees about this issue, employers will face challenges regarding exempt positions. These can be very costly and disruptive to the work place. Don’t wait until the last minute to take action. Now is the time to ensure you are working closely with your HR representative to make the necessary changes. Stay tuned for an upcoming webinar to review the new regulations in detail, and feel free to contact us to discuss further.