As you have probably heard the Department of Labor has set new rules regarding the minimum salary required for an employee to be exempt from overtime pay. This new rule is expected to impact an estimated 4.2 million workers.
What does that mean for employers? Every employer should be reviewing the compensation of all current exempt employees. This is a good time to consider all of the overtime exemption rules and ensure that all employees are classified properly.
The Department of Labor has set a deadline of December 1, 2016 for compliance. Employers should therefore be proactive in reviewing the status of each employee and preparing to make adjustments. However, stay tuned before making significant and sweeping changes. There is somewhat of a bi-partisan effort in congress to create legislation that would create a slower phase-in of the changes.
Some of the regulations outlined by the Department of Labor include the following:
● The DOL sets the minimum salary required to qualify for the white collar exemptions (the administrative, executive, and professional exemptions) at the 40th percentile of weekly earnings for full-time salaried workers in the region in which the salary level is lowest (currently the South). The Final Rule's salary level increase more than doubles the current salary threshold—which is $455 per week or $23,660 annually. This amounts to a minimum salary of $913 per week or $47,476 annually as of December 1st.
● DOL increases the total annual compensation requirement needed to exempt highly compensated employees to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally. Using data from the fourth quarter of 2015, the DOL set the new salary basis at $134,004 annually. This is a large increase over the current salary basis of at least $100,000 annually.
● The DOL has established a mechanism for automatically updating the minimum salary and compensation levels for these exemptions going forward. Under the Final Rule, the salary level will increase automatically every three years, starting January 1, 2020. The DOL estimates the salary basis for 2020 will be $984 per week, or $51,168 annually.
● DOL allows part of the salary threshold to be met with bonuses and commissions. For the first time, employers can count nondiscretionary bonuses, incentives, and commissions toward up to 10% of the required salary level. To credit such payments, however, employers must pay them on a quarterly or more frequent basis. If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to retain their exempt status the Department permits a "catch-up" payment at the end of the quarter. The employer has one pay period to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 13 week period). Any such catch-up payment will count only toward the prior quarter's salary amount and not toward the salary amount in the quarter in which it was paid. If the employer chooses not to make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter.
● The Department is not making any changes to the standard duties test. The Department believes that the increase to the standard salary level, coupled with automatic updating in the future, will address concerns that some workers who satisfy the standard duties test should be entitled to overtime pay because they are performing substantial amounts of overtime-eligible work (e.g., operating cash registers, stocking shelves, etc.). The Department also heard concerns from many employers, both in pre-rulemaking outreach and in comments on the proposal, that changes to the standard duties test would be disruptive to employers.
● For employees eligible for overtime compensation there is no requirement that they "punch in" and "punch out." Employers and employees have flexibility in designing systems to make sure appropriate records are kept to track overtime hours. As long as records are complete and accurate as to the number of hours worked each day, employers may use any method they choose.
● For an employee who works a fixed schedule, an employer need not track the employee's exact hours worked each day; rather, the employer and employee can agree to a default schedule that reflects daily and weekly hours, and indicate that the employee followed the agreed-upon schedule. Only when the employee deviates from the schedule is the employer required to record the changes to the hours worked.
● For employees with a flexible schedule, an employer does not need to require an employee to sign in each time she starts and stops work. The employer must keep an accurate record of the number of daily hours worked by the employee. So an employer could allow an employee to just provide the total number of hours she worked each day, including the number of overtime hours, by the end of each pay period.
Compliance with the new FLSA regulation can be tricky, but should be manageable. This is a good time to review all pay practices to ensure compliance. The first step is to identify exempt employees making under $47,476. Additionally, employers should at this point consider whether the duties of employees making over $47,476 qualify the employee for exempt status. For current exempt employees making less than $47,476 action will be required. For those employees, employers must determine whether to increase the employee’s pay to $47,476 or to change the employee to hourly. At this point an employer should also consider the pay of other employees performing similar duties. If an employer has multiple employees performing the same or similar duties but different compensation, there is the potential for a discrimination case. Lastly, for employees being changed to hourly, the employer will need to consider how the employee’s hours will be tracked and documented.
At Employer Support Services, we have the resources available to assist you with the new FLSA regulations. If we are currently providing HR services for you and we have not yet contacted you regarding your employee data, know that we have already reviewed your data and will be contacting you soon. If you are not an HR services client, contact us about conducting an FLSA audit. For additional information relating to this topic or any of the payroll, benefits, and HR services we provide, please contact us at 225-364-3000, or visit our website at www.employersupport.com.