As most employers are aware, the new Federal Overtime Rule takes effect December 1, 2016. Although efforts are underway to delay implementation of the rule, these efforts seem unlikely to be successful. All employers, therefore, need to be prepared to comply by December 1.
The primary change increases the minimum salary employers are required to pay executive, professional, or administrative employees in order to legally classify such employees as exempt from overtime under the Fair Labor Standards Act (FLSA). The minimum threshold for these “white collar” exemptions will go from $455/week ($23,600/year) to $913/week ($47,476/year).
Up to ten percent of the salary can include nondiscretionary bonuses, incentive pay, or commissions. The salary test will be adjusted every three years to a rate equal to the 40th percentile of full-time employees in the lowest wage region in the U.S. The highly compensated employee exemption, exempting highly compensated employees, is now tied to the 90th percentile of full-time salaried workers nationally, raising the annual salary basis for highly compensated employees from $100,000 to $134,004.
What Hasn’t Changed?
Classifying employees as “salaried” and paying salary rather than hourly still does not exempt an employee from overtime compensation. This remains a common misconception among employers, particularly small businesses and non-profits. The minimum salary threshold is only the first part of the two-part test to determine whether certain occupations are exempt from overtime. An employer cannot avoid the payment of overtime by simply designating an employee as salaried and paying that employee $47,476/year.
To truly be exempt under the white collar exemptions, employees must be paid at least $913/week (the salary test) and perform primarily executive, professional, or administrative duties (the duties test). The white collar exemptions are highly fact specific and job titles and job descriptions are insufficient to establish the exemption. A review of the employee’s actual duties is necessary to determine whether those duties fall within the exemptions.
The good news is the revisions do not alter other longstanding exemptions from overtime. For example, workers in agricultural or livestock production remain exempt. Similarly, outside sales representatives customarily and regularly engaged in making sales or sales-related activities away from the employer’s place of business are not subject to the minimum salary requirement, although they are subject to the duties test.
What Do I Do Now?
Existing positions and compensation levels should be reviewed immediately for compliance with all applicable wage and hour laws. Do not rely on the duties listed in the job description, but actually talk to employees and be familiar with the tasks being performed and the amount of time spent on those tasks.
When evaluating whether to convert employees to hourly rather than pay the increased minimum salary, carefully consider all costs associated with the conversion, including an evaluation of the amount of overtime your current exempt employees actually work. In some cases, paying the increased minimum salary may be far less costly than paying overtime for all hours worked in excess of 40 hours per week. Recall also that salaried exempt employees may be entitled to pay for an entire day, even if they are present for only a portion of a given work day, while hourly employees are paid only for the hours they actually work (unless they are on a paid leave).
Finally, give careful consideration to appropriately and clearly messaging any changes to your impacted employees. Employees in some instances may view being a “salaried” employee as more prestigious and will be concerned with any conversion to hourly pay. Employers should simply emphasize that they are simply attempting to make sure employees are appropriately paid for their work while fully complying with their legal obligations.
Peter Hicks is an employment and commercial litigation attorney at Jordan Ramis PC. He can be reached at 541-550-7900.