Overtime Law Exemptions Have Key Changes
Overtime Law Exemptions Have Key Changes
PLEASE NOTE: The changes to FLSA discussed below have been put on hold by the courts until further notice.
There’s been a lot of hullabaloo surrounding the new Fair Labor Standards Act (FLSA) overtime law exemptions. Many employers firmly believe the new regs will make them go broke or bankrupt if they are forced to raise wages. And while that may be true for some businesses, let’s not freak out.
Here’s a quick review of the current FLSA overtime law exemptions:
A position must pass 3 tests to be exempt from overtime pay:
- The Salary Basis Test: Employers must pay employees in exempt positions a predetermined and fixed salary each week. This salary must NOT be reduced based on changes in the quality or quantity of work/hours performed each week.
- The Salary Test: Employers must pay employees in exempt positions a minimum of $455/week.
- The Job Duties Test: Employees in exempt positions must be performing duties that are outlined in the Executive, Administrative, Professional or Computer Professional regulations. Remember, job titles alone are not enough to meet the exemption.
If you aren’t familiar with the current overtime law exemptions, our Job Classification Kit provides specific questionnaires to complete. You can use these questionnaires to easily determine if a position is legally exempt or non-exempt from overtime. (At the end of this post, download one of our Exemption Questionnaires to sample what’s included in our Job Classification Kit.)
You must understand the new overtime regulations and make your own assessments.
Here are 5 overtime law exemptions changes:
1. Effective Date:
December 1, 2016 is the tentative effective date for the new overtime law exemptions. Take steps now to examine your workforce and identify red flags. You must decide how to address them. Don’t put this review off; careful and early planning is vital.
2. Change to Minimum Salary Test Amount:
The changes impact the Salary Test only. The Salary Basis Test and the Job Duties Tests all remain the same. The changes to the salary test raise the minimum salary from $455/week to $913/week. As you can see, that’s double the current rate. It’s unfortunate, perhaps, that this old rate is being increased in one fell swoop. It really is overdue, however, when you consider that the last change was made in 2004.
3. New Definition of Highly Compensated Salary Level:
The definition of a “highly compensated” position is increasing from $100,000 annually to $134,004 annually. Keep in mind that this position must also still pass the Salary Basis Test and the Job Duties Test. I know what you’re thinking. “Why do I need to worry about the Job Duties Test if my employee is making $100k a year? That’s crazy!” While it may seem crazy, it is still the law and a highly compensated employee must also be performing job duties that fall under the Executive, Administrative or Professional exemption. We explain this in detail in our HR 101 course.
4. Use of Bonus and Commissions toward Salary Test:
Incentive payments can account for up to 10% of the minimum salary level. These include commissions and non-discretionary bonuses tied to productivity and profitability, except for Highly Compensated Positions. Highly Compensated Positions are already allowed to use commissions, non-discretionary bonuses and other incentives to meet the annual salary requirement.
5. Automatic Increase to Salary Test:
The new law also schedules automatic increases every three years. The next increase begins on January 1, 2020. The Department of Labor will announce the new Salary Test standard (based on calculations already outlined in the regulations) prior to January 1, 2020. Each employer will then re-assess any impact to their workforce.
Now you’ve seen the new updates to the Fair Labor Standards Act. It’s time for you to figure out exactly how these changes will impact your business. Once you know that, you can decide what you need to do to ensure your business remains in compliance.
WHY ARE EMPLOYERS SPITTING AND MOANING ABOUT THE NEW OVERTIME LAW EXEMPTIONS?
For most employers the greatest concern is for the salary increase to $913/week. That Is quite a jump and it can be impractical for employers to raise the salary of every exempt employee in their workforce. So what’s a company to do?
3 RIGHT AND WRONG WAYS TO ADDRESS THE NEW OVERTIME LAW EXEMPTIONS
EXAMPLE 1:
Correct: You increase the exempt employee’s salary to the new Salary Test wage effective December 1, 2016. Assuming the position meets the Salary Basis Test and the Job Duties Test, you have a clean update. No need to track the hours worked by the exempt employee. However, it can still be helpful if you ever need to defend against a wage and hour claim.
Incorrect: Don’t put the Salary Basis Test at risk by reducing wages if the exempt employee works a reduced work schedule. The Salary Basis Test requires that employers pay a fixed salary each week that is not reduced based on changes in the quality or quantity of work performed, including fewer hours.
In other words, you have an exempt employee you pay a salary of $1000 per week. This employee works 43 hours on average each week. One week the employee only works a total of 38 hours. Since the exempt employee worked 5 hours less than normal, you decide to deduct wages from the salary. Even if the final amount you pay meets the Salary Test, you just put your overtime law exemptions status at risk for this employee. You failed to meet the Salary Basis Test which requires a set wage that is not changed based on quality or quantity of work.
EXAMPLE 2:
Correct: You leave the salary the same but convert the position to a non-exempt classification. You pay the employee overtime wages when overtime is worked. This eliminates the need to worry about the Salary Basis or Job Duties Tests for exemption from overtime. However, you must track the actual hours worked now.
You might have to deal with an employee’s perception that they feel downgraded from a salary to an hourly status. Explain to the employee that they may, in fact, receive more compensation due to working overtime. This is the true intent of the new regulations.
Incorrect: In order to ease the mind of the affected employee, you decide to not track their hours. You don’t want them to feel demoted. So you continue to provide them with other types of benefits that are given to exempt employees. This is illegal! You must track hours for non-exempt employees. The Fair Labor Standards Act requires you to do so in order to pay the employee accurately. Allowing non-exempt employees to keep other benefits enjoyed by exempt employees will cause confusion and low morale throughout your workforce. It can even cause chaos with your benefits administration processes and in some cases may be in violation of other employment laws.
EXAMPLE 3:
Correct: You keep the current salary the same, convert the position to a non-exempt classification and pay the employee overtime wages when worked. At the same time, you implement a No-Overtime Policy so that overtime is not worked. This means you will not have increased your labor expenses. Nevertheless, the employee may be very upset due to the loss of status without the benefit of increased wages due to overtime.
Incorrect: When you make the decision to eliminate overtime work it can be very effective in reducing labor costs. As long as you do not overly damage production schedules when you do so. Be aware however, that in the event someone does work overtime, you must pay the employee for that overtime. It does not matter if the employee had management approval first. It is illegal to deny overtime pay once an employee has performed overtime work.
Train your managers to know what is happening throughout the day and to closely manage schedules when employees are approaching the overtime hour’s threshold. The appropriate way to handle employees who work overtime without prior approval is to follow your Disciplinary Action Policy. This should be outlined in your Employee Handbook.
One last reminder:
Exempt employees often work from home in the evenings. They answer calls and respond to emails during off-duty hours. They travel to conferences and other seemingly minor activities. When non-exempt employees do these activities during off-duty hours or in excess of overtime thresholds, they are working overtime and you must pay them accordingly. Employers must track and record these activities. Therefore, you should hold a thorough review with each employee that is impacted by the new overtime law exemptions. You need to ensure the new regulations and your new policies are understood. If you need help determining if your positions meet the overtime exemption, click below to download a FREE copy of our Administrative Exemption Questionnaire. This will guide you through the process to see if the position meets the Administrative exemption requirements.
