If you haven’t started planning for the upcoming overtime changes, now is the time. As a reminder, on May 18, 2016, the U.S. Department of Labor (DOL) released a new rule regarding overtime wage payment in the United States. This new increases the salary threshold that “white collar” employees must meet in order to qualify for an overtime wage payment exemption. Employers must comply with the new rule by Dec. 1, 2016. Given the significant impact this change could have on your company’s bottom line, it is important to start examining your payroll records and re-evaluating your overtime policies now in order to avoid compliance penalties in 2017 and beyond.
What is changing?
In order for an individual to be considered exempt from overtime under the “white collar exemption” that applies to professional, executive and administrative employees, they must meet three requirements. The second requirement is the only one that changed in the new regulations. The salary basis requirement and the duties test stayed the same
1- They must be paid on a salary basis (not hourly, piece rate, etc.).
2- They must be paid at least a minimum salary of $23,660 (increasing to $47,476 on December 1, 2016).
3. They must pass the FLSA duties test for overtime exemption based on their work.
In order to prevent the salary thresholds from falling behind in the future, the final rule requires that the minimum salary level requirements for the white collar exemptions will be updated every three years, starting with the first update January 1, 2020.
For administrative, executive and professional employees, the final rule allows employers to count up to 10 percent of employee nondiscretionary bonuses, incentive payments and commissions as part of the standard salary level—a practice that is not currently permitted. These bonuses may allow employers to more accurately represent employees’ earnings and help determine whether white collar exemptions should apply.
Employers are allowed to make one catch-up payment at the end of each quarter to satisfy the standard salary level. Payments must be made within one pay period after the quarter.
The final rule also increases the $100,000 salary level for highly compensated individuals to $134,004 per year—the 90th percentile of full-time salaried workers nationally.
What do employers need to do?
Employers should review their salaried exempt employees and determine if they have any employees that they are currently classifying as exempt from overtime under the professional, executive and administrative exemption or the highly compensated employee exemption. Then employers should identify those employees in this group whose salary below the new threshold.
These are the individuals you need to determine the best course of action for moving forward. Here are some examples to help you weigh your options.
Example #1- Employee who works regular overtime
Mary is a Graphic Designer whose work falls under the creative professional exemption.
She is currently paid a salary of $39,000 per year.
Mary’s work routinely takes her 46 hours per week (which means she works 312 Hours of overtime per year).
Option 1: Maintain exempt status and increase Mary’s salary to $47,476 per year.
Increased cost to employer: $8,476 per year
Pros: No need to track Mary’s hours, potentially improved employee morale due to pay increase
Con: Increased cost to employer
Option 2: Maintain Mary’s salary at $39,000/$18.72 per hour and adjust her status to non-exempt
Increased cost to employer: $8,776.56 per year (in overtime pay)
Pro: Potentially improved employee morale due to pay increase
Cons: Increased cost to employer, adjustment in employee status, need to track Mary’s hours
Option 3: Maintain Mary’s salary at $39,000/$18.72 per hour, adjust her status to non-exempt and limit overtime
Increased cost to employer: Depends on actual overtime worked
Pro: Minimal cost increase to employer
Cons: Need to redirect some of the employee’s work somewhere else, adjustment in employee status, need to track Mary’s hours
Option 4: Adjust Mary’s pay to $15.31 per hour and adjust her status to non-exempt
Increased cost to employer: $9.88 per year
Pro: Minimal cost increase to employer
Cons: Potentially decreased employee morale due to perceived decrease in pay and adjustment in employee status, need to track Mary’s hours
Example #2- Employee who works occasional overtime
Greg is a Business Manager whose work falls under the administrative exemption.
He is currently paid a salary of $39,000 per year.
Greg’s work usually takes 40 hours per week. His overtime is rare, only totaling 36 hours per year.
Option 1: Maintain exempt status and increase Greg’s salary to $47,476 per year.
Increased cost to employer: $8,476 per year
Pros: No need to track Greg’s hours, potentially improved employee morale due to pay increase
Con: Increased cost to employer
Option 2: Maintain Greg’s salary at $39,000/$18.72 per hour and adjust his status to non-exempt
Increased cost to employer: $1,012.68 per year (in overtime pay)
Pro: Small increased cost to employer
Cons: Adjustment in employee status, need to track Greg’s hours
Option 3: Maintain Greg’s salary at $39,000/$18.72 per hour, adjust his status to non-exempt and limit overtime
Increased cost to employer: Depends on actual overtime worked
Pro: Very minimal cost increase to employer
Cons: Need to redirect some of the employee’s work somewhere else, adjustment in employee status, need to track Greg’s hours
Option 4: Adjust Greg’s pay to $18.28 per hour and adjust her status to non-exempt
Increased cost to employer: $9.52 per year
Pro: Minimal cost increase to employer
Cons: Potentially decreased employee morale due to perceived decrease in pay and adjustment in employee status, need to track Greg’s hours
As you can see, there are multiple options and each situation is unique. As an employer, you will likely need to review each employee’s situation independently before making your decision. If you need help, contact A Plus Benefits for assistance at 1-800-748-5102 or humanresources@aplusbenefits.com.