Preparing for the New Overtime Rules
A question employers often have is when are employees entitled to time-and-a-half (1.5x) overtime pay? New regulations were issued by the Department of Labor (“DOL”) in May 2016, which will significantly adjust the minimum “salary level” for workers in “white collar” positions to be exempt from overtime under the Fair Labor Standards Act (“FLSA”). The salary level will more than double when the new rule goes into effect on December 1, 2016. How can you make sure that your company is ready?
Overtime rates apply to any hours worked over 40 hours in a given workweek by employees in nonexempt jobs. The vast majority of U.S. jobs are paid hourly and not exempt from overtime. Overtime must be paid at no less than one and one-half times the nonexempt employee’s regular pay rate.
Determining what the “regular rate of pay” is in any workweek can be difficult, though. Also, it can change from one week to the next as well, too — based on certain bonuses, incentives and other types of nondiscretionary forms of pay.
The new salary level threshold is one of three tests that executive, administrative and professional (“EAP”) workers must pass before they’re exempt from overtime pay:
- Salary basis. This test assesses how your employees are paid. To be exempt from overtime, workers must be paid on a “salary or fee basis” and this amount can’t be reduced because of the quantity or quality of work. If the employee is paid hourly, then they cannot be exempt.
- Salary level. This test considers how much employees must earn, on a salary basis, before their jobs can be exempt from overtime.
This is where the big change is happening. The salary threshold will increase from $455 a week to $913 a week (from $23,660 to $47,476 a year). The threshold will be automatically updated every three years, with the first update occurring on January 1, 2020. Each update will bring the threshold to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region, which currently is the Southern U.S.
In addition, employers can use nondiscretionary bonuses and incentive payments in order to satisfy up to 10% of the new salary threshold — but these payments must be made at least quarterly.
- This test looks at your employees’ job responsibilities. Only the EAP classifications are affected (not outside sales along with a few additional classifications).
An executive employee’s primary duty must be managing the business, or one of its departments or subdivisions. This employee must also:
- Customarily and regularly direct the work of at least two full-time equivalent employees,
- Have the authority to hire and terminate employees, and
- Have his or her recommendations regarding hiring, terminating and promoting other employees be given particular weight.
An administrative employee must perform office or nonmanual work directly related to the management or general business operations of the employer or its customers, and must include the exercise of discretion and professional judgment. This is probably the most misunderstood and misapplied exemption, so you should certainly consult an expert if you have any questions at all about the employee’s status.
A professional employee’s primary duties must involve work that requires advanced knowledge in a field of science or learning (usually indicated by a four-year degree); the consistent exercise of discretion and judgment; invention, imagination or originality; or talent in a recognized field of artistic or creative endeavor.
As these three tests show, employees’ exempt status isn’t determined merely by job title alone — nor is it determined entirely by the salary paid. It’s only when EAP employees satisfy all three tests that they’re typically exempt from overtime.
Meeting the New Requirements
Employers can meet the new overtime requirements in several ways. One simple option, they can raise employees’ salaries so they exceed the new $913 per week threshold to keep them exempt from overtime — but, obviously this could prove to be quite costly for your business. They also could calculate a pay rate based on 40 hours in a week at their current pay level, or more likely, estimate average overtime worked and recalculate a lower hourly rate of pay.
Some employers may be able to reorganize workloads to minimize overtime. Or they can hire more people and keep overtime to a minimum (but this could be difficult given the tight labor market – and, also may not lower your costs overall).
You can use any method that you wish for the tracking and recording of employee overtime hours, as long as it’s both complete and accurate. Technological solutions may assist employees who weren’t required to track their time in the past. This will be a communications and enforcement challenge for employers and could have negative consequences on benefits eligibility, work hours flexibility and morale.
Alternatively, employers can classify employees as nonexempt salaried, which may be appropriate if overtime is not common. However, if employees remain salaried (paid the same every week, even if they work less than 40 hours), they still must track their time and be paid overtime for all hours worked over 40 hours in a week.
According to the DOL, the new rules will reclassify about 4.2 million workers from overtime exempt to nonexempt status. Chances are, your business is covered and must pay overtime to nonexempt employees. We can provide more details.
Sidebar: Highly Compensated Employees Get Adjustments Too
The new overtime regulations (see main article) also bring with them a change to the total annual compensation requirement for highly compensated employees (“HCEs”). Formerly at $100,000, the total annual compensation requirement is now set at the 90th percentile of full-time salaried workers nationally, or $134,004. Most workers earning above this level will be ineligible for overtime, provided they receive at least the standard salary level via a salary or fee, and meet a minimal duties test. The new HCE salary will be adjusted every three years, with the first occurring on January 1, 2020.
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