New Overtime Rule Changes Salary Basis Requirement

Do you pay any employee on a salary basis instead of paying them hourly and overtime? Of course you do, so you need to be very aware of the new final overtime rule issued by the U.S. Department of Labor on May 17, 2016.

You must pay your salaried employees at least $913 per week ($47,476 per year) beginning December 1, 2016, or you will be in violation of the Fair Labor Standards Act (which you do not want to violate).

In the past, salaried employees had to be paid $455 per week ($23,660 per year) to qualify as an employee exempt from the FLSA’s requirement of paying overtime for every hour over 40 worked in any one workweek. That salary basis has doubled under the new regulations.

In addition to meeting this increased salary level, the salaried employee must perform the duties of an exempt employee (the white collar exemptions: executive, a professional or an administrator). These duties tests are much more difficult to meet than most people think, so don’t just assume that your salaried employees are actually exempt. For example, not every “manager” is an “executive exempt employee”, who under the FLSA must have the power to hire and fire and must supervise at least 2 full-time employees, as well as being in charge of a recognizable store, division or branch of your business.

This increase in the threshold salary required to consider an employee exempt could change the classification of many Panhandle-area retail managers and assistant managers, human resources directors, marketing professionals, bookkeeping employees, project managers, foremen, performers, and other employees who have not been earning overtime in the past.

Now those exempt employees will either get a raise to get them over the $913 per week threshold or they will have to be changed to nonexempt, hourly employees who earn overtime. Either way, it could mean an overall increase for the employee and higher payroll costs for the employer.  

Morale issues are inevitable when your salaried employees have to be changed to hourly employees, because salaried employees will feel devalued and under-appreciated. Some will feel the loss of the “prestige” and flexibility that comes with being paid a salary. This change may also cause a loss of certain benefits only available to exempt employees.

Because of that feeling of demotion, as an employer, you might want to look for ways to increase salaries if your exempt employees are anywhere near the $47,476 salary number. If you can’t afford that increase in salaries, you will need to bite the bullet and make those employees non-exempt, hourly workers.

The good news is that many employers have been paying employees on a salary who don’t actually qualify as an exempt employee under the duties tests. That means that right now is a great time to correct those very costly errors before the Department of Labor decides to audit you (which they are doing in Amarillo every day).

Another feature of the new FLSA rule is that every three years, the salary basis number that exempt employees have to meet or exceed will automatically increase, with the first increase expected to require salaries around $51,000 per year in 2020. So you need to also consider future increases that you will be required to make as you decide whether to pay your exempt employees on salary or place them on hourly pay plus overtime.

If you have very highly compensated employees who as of December 1 will be making more than $134,004 per year (up from $100,000 before), you don’t even have to worry about what duties they perform. These highly compensated workers are automatically exempt employees under the FLSA.

One small positive change with the newly-announced rule is the ability of employers to now make up 10% of the salary basis test with bonuses and commissions. So if you pay an executive, administrator or professional employee no less than $42,728.40 in yearly salary and then the employee earns another $4747.60 in bonuses and commissions (paid on at least a quarterly basis), you will not be in violation of the new rule.

There are a few white-collar exempt employees that this new salary basis rule does not affect: teachers, lawyers, doctors, outside sales people and computer professionals. Additionally, more hands-on jobs such as professional truck drivers, farmworkers, cattle feeders, ranch hands, airline employees, house parents, livestock auction workers, newspaper deliverers, seasonal amusement park employees, railroad employees, and a few other job classifications will continue to be exempt from the overtime rules without being paid the minimum salary of $913 per week.

So what do you need to do right now to get ready for this rule change?

  1. Review the salaries you are paying and determine whether your employees can remain exempt by meeting or exceeding the $47,476 threshold or should be treated as nonexempt and eligible for overtime because they make less than $913 per week. There is an online calculator from ADP that you may find helpful with this.
  2. Review the actual duties that your salaried employees are performing with your employment lawyer to know for sure if the employee can be treated as exempt. Decisions relating to FLSA are not for the uninformed. I’ve been dealing with the FLSA for more than 20 years and it can be tricky. All business owners and managers need to get quickly educated about these issues and also rely heavily on their employment lawyers and accountants. Together you should do an individual exemption analysis on the duties actually performed by each and every employee to whom you pay a salary even if you plan to pay more than $47,476 to that employee so you can assure that employee is actually exempt.
  3. Finish your individual exemption analyses and be ready to make the compensation changes long before the December 1, 2016, effective date of the new rule. Communication will be key in dealing with the morale issues in your workforce, so don’t wait until the last moment.
  4. Be very careful as you change compensation rates for employees that you don’t inadvertently violate the Equal Pay Act by paying a male employee, for example, more than a female employee performing the same work.
  5. Also, be concerned about internal perceptions of fairness if you increase one employee’s salary but not another. Your employees legally can, and will, discuss salary changes.
  6. Don’t count on limiting an employee’s hours to less than 40 in a workweek so you can avoid the costs of overtime. If the exempt employee was regularly working more than 40 hours per week, the job will not suddenly get less time-consuming when the employee is paid by the hour. Your loyal employees will just try to fudge and say that they only worked 40, which can cost you tremendously in a DOL audit or wage and hour lawsuit. And for the less loyal employees who like to say they worked a lot of overtime, remember, you still have to pay overtime pay even if the overtime was “unapproved”. You can discipline the employee with warnings and suspensions, but not by docking pay.
  7. Get a good time-keeping software package, preferably with mobile capabilities, because having perfect time records is the employer’s legal responsibility. Sloppy time records will cost you dearly in this time of increasing wage and hour enforcement efforts by the DOL. And remember that non-exempt employees replying to work emails on the weekend or logging in remotely just to finish something is all “time worked” for overtime purposes and must be recorded. You can prohibit these newly-non-exempt employees from working after hours, but some are still going to do it and must be paid accordingly.
  8. Continue to be careful about the FLSA danger areas, such as non-discretionary bonuses, after hours or off the clock work, meal breaks, travel time and “comp time”.
  9. There are a couple of options to continue to pay an employee on a salary basis even if not exempt, such as the fluctuating workweek method, but these require written agreements and several legal hoops to jump through. Don’t attempt these hybrid salary options for non-exempt employees without input from your employment lawyer.

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