Of this much I am sure: The known is always easier to handle than the unknown. For almost a year, we’ve been discussing the dreaded day when the DOL released its final rule regarding changes to the salary test that must be met for an employee to be exempt from overtime requirements. Today the final rule was released with a compliance date of December 1, 2016. So now we know – and when you know, you can create a plan. This blog will help you do just that.
But first, a couple of background paragraphs to make sure everyone understands what is happening. Last year the DOL proposed changes to the rules regarding when salaried employees can be exempt from the FLSA overtime requirements. As you may know, to meet the most common exemptions from the FLSA overtime requirements, an individual must be paid on a salaried basis that complies with certain rules and meet one of three duties tests: 1) administrative, 2) executive or 3) professional.
Currently (until 12/1/2016) to meet the salary test, employees generally have to be paid the same salaried amount for any workweek in which they perform any work and be paid $455 a week or $23,660 a year. The final rule changes that amount to $913 a week or $47,476 a year. Further, the rule establishes a mechanism that will allow for automatic updates to the threshold amount every 3 years. (The 2020 threshold is projected to be $51,000.) So what should you do to comply?
STEP ONE: Figure out how many employees you currently have who are classified as exempt but make somewhere between $23,660 and $47,476 a year.
STEP TWO: For each of those employees, ask them to keep an hours log (if they do not already) for the next few weeks so you can determine how much overtime they are working. Employees who are working very little overtime do not pose much of a financial problem. They may easily be converted to nonexempt salaried with an overtime hourly rate based on their current salary and told they must have permission before working overtime.
STEP THREE: With this information determine the following for each employee who is working more than 1-2 hours of overtime a month:
- What is the employee’s current hourly rate based on salary paid?
- If you had to pay the employee overtime at this rate, what would be the extra expense?
- How does the overtime expense compare to raising the employee’s salary to meet the threshold?
- What hourly rate would you have to pay the employee to keep the employee’s pay near the current amount?
- How does that hourly rate compare with the hourly rate of your current hourly employees with less responsibility?
- Are any of these employees paid commissions or nondiscretionary bonuses? You can now count commissions and nondiscretionary bonuses for up to 10% of the required salary amount. If you plan to use this to meet the exemption, consult counsel because it is somewhat more complicated than it sounds.
STEP FOUR: Determine based on the information gathered in step 3 whether you should:
- Increase the employee’s salary to meet the threshold (with the understanding the threshold will change every 3 years),
- Make the employee hourly and pay overtime,
- Divide the job into two hourly jobs, or
- Consider the fluctuating workweek. The fluctuating workweek only works for nonexempt employees who truly fluctuate between having workweeks with less than 40 hours and workweeks with more than 40 hours. When an employee works on a fluctuating workweek, you can pay the employee a set amount each week and then pay 1/2 time for overtime in weeks over 40. This can be complicated so if you want to use this approach, I suggest that you speak with counsel prior to making a decision about implementation.
STEP FIVE: For those employees who are becoming hourly, you will need to determine an appropriate hourly rate that will not break the bank, but can be defended based upon the employee’s skill level and responsibilities. You want to keep pay discrimination concerns in the forefront of your mind as you make these determinations.
STEP SIX: If you have any employees who are exempt based on the highly compensated exemption, the total pay has been increased from $100,000/year to $134,004/year. So, if you are relying on this exemption, you will either have to increase salary or determine if the employee can be fit into another exemption.
STEP SEVEN: Take this time to consider whether you have any other employees improperly classified. This will be a very good time to make changes without drawing too much attention.
STEP EIGHT: You must have all employees’ classifications (exempt or nonexempt) compliant by December 1, 2016.
STEP NINE: Once you have determined how to treat each employee, develop a communication plan to explain the changes to the employee. Make sure that employees who are being converted to hourly understand that they are now required to keep accurate time logs and that they must have permission prior to working any overtime. They also should understand that they may have their pay docked for time missed from work.
STEP TEN: Make sure your systems are set up to handle the changes so that you are keeping appropriate records for those employees who have been reclassified.
Many employers have been waiting a year to learn what the final salary rule is going to be. Now we know, and now you have a plan and time to implement it.