On May 18th, the Obama Administration issued a final ruling on new salary thresholds for exempt employees. The new rule changes the salary level at which an employee can be classified as exempt from overtime. Please review the following details if you are paying employees in your business and are subject to the Fair Labor Standards Act (FLSA). Currently, an employee who makes over $23,660 per year and who also meets certain criteria related to the duties they perform in their job can be classified as exempt (salaried), and are ineligible to receive overtime pay for hours worked over 40 in a week.
The new salary threshold is $47,476 per year (or $913 per week). This means that employees earning less than the threshold of $47,476 per year should be treated as “non‐exempt” employees, and therefore become eligible for overtime pay. The Department of Labor did not make any changes in the duties tests for exempt employees – the five duties currently in place (administrative, executive, highly qualified professional, computer professionals, outside sales professionals) remain the same. However, it is important to remember that regardless of an employee’s duties, the new threshold for salary still applies. Barring any legal challenges or legislative relief, the new rule will go into effect on December 1, 2016. Failure to comply with the rule can result in Department of Labor investigation and large fines, penalties and judgments for back pay being levied against your business.
Please be aware, there has been and will continue to be widespread news coverage about this rule change. Employees making less than a $47,476 salary will probably know (or find out) that they are eligible for a raise, or should be reclassified and paid overtime going forward. As with any Department of Labor law or rule, an employee complaint is all that it takes to trigger a costly (in terms of time and money) investigation. We recommend our clients should make a plan to bring their compensation into compliance now, rather than wait and hope that the new rule will be repealed or overturned. The Department of Labor has indicated that they plan to enforce compliance with the rule immediately after the compliance deadline of December 1, 2016.
What should you do at this point? If you currently have salaried employees who are earning less than $47,476 per year, you have two options:
- You can raise that person’s salary above the threshold, and therefore maintain their eligibility for exempt status and don’t have to pay overtime; or
- You can maintain that person’s rate of pay at the same level, but please understand that they (and you) will now have to track their hours, and they must be paid overtime if they work over 40 hours in a week.
The best course of action is going to be a judgment call on your part, informed by some careful calculations. If you have a salaried employee earning less than the threshold, who is currently regularly working in excess of 40 hours a week, it may be more cost‐effective to raise that person’s salary to the threshold of $47,476 than it would be to pay them overtime (or to hire another employee to work the excess hours). If you have a salaried employee who does not regularly work over 40 hours per week, it may be better to convert them to a non‐exempt (hourly) status at their same rate of pay, and then track their hours. Employees who are reclassified to non‐exempt status may need to be instructed on proper timekeeping procedures. This may be a change for them, and they may resent it, or not understand why it is necessary. It’s very important to structure your conversation so that it is positive and productive, but also makes clear there is no room for noncompliance with timekeeping procedures.
Please remember that in some cases, changing an employee’s status from exempt to non‐exempt (or cutting their work hours) may affect their eligibility for benefits. You may also need to re‐examine your employee handbook to ensure your policies regarding pay and benefits are in line with the new rule, make any changes as necessary, and reissue the handbook. You may also want to have employees sign an acknowledgment of receipt of the changes.
If you have any questions or would like more details regarding the new DOL Overtime rules, please be sure to contact us.