The Department of Labor (DOL) has finalized a rule that, effective Dec. 1, 2016, will make significant changes to the overtime regulations in the Fair Labor Standards Act (FLSA). Many employers, especially small businesses, have questions about how the new regulations will apply to their business, who will be affected, and what specifically will be required.
The New Rule Changes
As you know, employees covered by the FLSA must receive overtime pay for all hours worked over 40 in a workweek at a rate of not less than one and one-half times their regular rates of pay, unless otherwise exempt. There are some “white collar” exemptions, which exclude the following from federal minimum wage and overtime rules:
- Certain executive, administrative, and professional
- Outside salespersons
Under the new rule, to qualify for exemption, white collar employees generally must:
- Be salaried, meaning that they must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
- Be paid more than a specified standard salary amount. Beginning December 1, 2016, the employee must be paid a salary of $913 per week ($47,476 per year) for a full time worker. This is an increase from the current amount of $455 per week (the equivalent of $23,660 annually for a full-year employee) in existing regulations (the “salary level test”);
- Primarily perform executive, administrative, or professional duties, as provided in the DOL’s regulations (the “duties test”).
In essence, this means that any employee making less than $913 per week, or $47,476 per year may be eligible to receive overtime pay. Please note that employers are not necessarily in compliance with the new standard salary threshold if they just meet the $47,476 annual threshold. An employee’s eligibility to receive overtime is determined on a weekly basis. Following are the special scenarios the rule addresses.
Nondiscretionary bonuses and incentive payments
The final rule allows employers for the first time to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level. These payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, the final rule requires the payments to be paid on a quarterly or more frequent basis and allows the employer to make a “catch-up” payment.
An employee who earns $822 per week (90% of the standard salary level) must be paid a quarterly bonus of at least $1,183 ($913 − $822 = $91; $91 × 52 weeks = $4,732 per year; $4,732 ÷ 4 = $1,183 per quarter) to meet the standard salary level requirement for the quarter. If the bonus the employee receives during the quarter is less than $1,183, the employee will be eligible to receive overtime during that quarter unless the employer makes a catch-up payment in the first pay period after the quarter to meet the $1,183 threshold.
Highly Compensated Employees
The total annual compensation threshold for a highly compensated employee will increase from $100,000 to $134,004 in December ($913 per week rather than the current $455 per week). The final rule makes no changes to the requirement that highly compensated employees (HCEs) must receive at least the full standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. If employees earn at least $913 per week and pass the standard duties test for a white collar employee, they will not be affected by the increase in the HCE total annual compensation threshold. If they only pass the relaxed duties test for a HCE, the employer would need to raise their compensation to the new threshold ($134,004 per year) to retain their exempt status. While HCE employees must receive 100% of the $913 weekly threshold on a salary or fee basis, non-discretionary bonuses and incentive payments (including commissions) may be used to satisfy the remainder of the $134,004 total annual compensation requirement.
The final rule makes no changes to any of the existing job duty requirements to qualify for exemption from overtime.
Outside sales employees
Outside sales employees are not subject to the salary basis or salary level requirements, and, therefore, are not affected by the rule changes.
Paying a salary to non-exempt employees
“Salaried status” and “exempt status” are separate concepts, so employees entitled to overtime pay may still be paid on a salary basis as long as they receive overtime pay for working over 40 hours in a workweek.
A seasonal employer must comply with these rules during the period the employer is open for business. For example, if a seasonal employer is open during 8 months of the year the employer will need to guarantee during the eight-month period that at least $913 per week is paid to an employee exempt from receiving overtime.
Employees with one particular job classification do not all have to be classified as either eligible or exempt from overtime. The determination is made on an employee by employee basis.
What can you do to comply with the new rule?
The DOL notes that employers have multiple options for complying with the new overtime rule. Options include:
- Raise salary and keep the employee exempt from overtime. Employers may choose to raise the salaries of employees to at or above the salary level to maintain their exempt status, if the employees meet the duties test. The DOL says that this option works best for employees who have salaries close to the new salary level and regularly work overtime.
- Pay overtime in addition to the employee’s current salary when necessary. Employers can also continue to pay their newly overtime-eligible employees the same salary, and pay them overtime whenever they work more than 40 hours in a week. The DOL says that this approach works best for employees who work 40 hours or fewer in a typical workweek, but have occasional spikes that require overtime for which employers can plan and budget the extra pay. The DOL also notes that there is no requirement in the rule to convert employees from salaried to hourly in order to calculate their overtime pay.
- Limit workers’ hours to 40 hours per week. Under this option, employers must ensure that workload distribution, time, and staffing levels are all managed appropriately for their white-collar workers who earn below the salary threshold. Employers could hire additional workers to achieve this goal.
The Wamhoff Accounting team is here to answer any questions you may have regarding the new rules. We’ve already begun helping our clients to work through these changes, and advise them on the best course of action for their businesses. Please let us know how we can help you!