Overtime exemption rules and how they impact your business
Posted on June 3rd, 2016
By Chris Hadden, CPP
Technical Sales Manager
We’ve been blogging about it, tweeting about it, and planning for it since Q3 2015. However, it still seems almost surreal that the overtime exemption rules are changing. Just a minor change? Certainly not.
After the Department of Labor (DOL) went over a decade without making any changes, a massive overtime change is now rolling out on December 1.
As of December 1, the new ‘white-collar’ exemption salary minimum is jumping from a minimum salary requirement of $455 per week to $913 per week ($47,476 annually). While this is a very large jump, this is actually less than the originally proposed amount of $970 per week.
What’s another notable change from the proposed July 2015 ruling to the final ruling? The final ruling amends the salary basis test so that employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level if paid at least quarterly.
So, now that the final salary threshold has been set for 2016, can we assume there will be no more changes? Not exactly, but there is some relief. As mentioned in some of our earlier blogs, while the proposed rule would have adjusted exemption salary thresholds yearly, based on a CPI or percentile basis, the final rule makes automatic adjustments every three years based on the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage Census region. The DOL made this change in response to concerns about the burdens associated with updating the salary level on an annual basis. The first adjustment will occur on January 1, 2020.
Just as the Affordable Care Act (ACA) has drawn much controversy, so have these new DOL rulings. However, just as we have all learned with ACA, controversial rulings are still laws. These laws must still be followed by businesses regardless of their stance on the matter.
So, why is any of this changing anyways? According to the DOL, when the salary level test is set at a high level, it provides an effective method of distinguishing between white-collar workers who are eligible for overtime and those who are exempt, without resorting to the duties test. The DOL believes that, currently, too many workers are eligible for the exemption under the salary test but don’t come close to meeting it under the duties test because of the disproportionate amount of nonexempt work they perform.
Who will benefit from this change? According to this White House fact sheet, this ruling will extend overtime protections to 4.2 million more American workers who are currently ineligible for overtime pay under federal law and are projected to boost wages for workers by $12 billion over the next 10 years, with average annual wage increases of $1.2 billion.
Is a worker’s salary the only thing to consider? A worker must still meet the following to be considered overtime exempt.
- They must be paid on a salary basis not subject to reduction based on quality or quantity of work (salary basis test) rather than, for example, on an hourly basis;
- Their salary must meet a minimum salary level, which as of December 1, 2016, will be $913 per week, which is equivalent to $47,476 annually for a full-year worker (salary level test); and
- The employee’s primary job duty must involve the kind of work associated with exempt executive, administrative, or professional employees (standard duties test).
For more information on the final changes, please see this FAQ from the DOL.
So, what can business do to prepare? The best thing businesses can do at this point is to begin understanding what potential impact this has on their current employees:
- Identify all employees who are classified as OT exempt, earning less than $47,476 annually.
- Sum up all of their hours worked per week.
- If the hours are not currently being tracked for these employees, begin tracking immediately.
- Determine which employees are currently working more than 40 hours per week, and identify the additional OT cost the business would absorb based on these proposed regulations.
- Make a determination to either reclassify the status to hourly, OT eligible or bump up the employee’s annual salary to exceed the minimum thresholds.
- Now would also be an excellent time to review the duties test on employee positions currently classified as overtime exempt. Just simply bumping up someone’s salary over the new threshold does not necessarily make them eligible for overtime exemption.
- Do not neglect employee communication. Poor communication with employees could lead employees to feel like the have been given some a demotion if they go from a ‘salary’ to ‘hourly’ classification.
- Consider what other impacts this ‘salary’ to ‘hourly’ reclassification may have on your employees. Such as benefit and vacation time eligibility.
If you are already tracking your employee’s time through Greenshades and need assistance modifying your setup, click here to read our technical blog by Justin Kirkland.