Understand how they may affect your business
On May 23, 2016, the Department of Labor (DOL) issued final regulations regarding the determination of which of an employer’s employees would be entitled to overtime pay. The changes could result in many more employees of certain employers being eligible for overtime pay, which could force employers to either change their wage structure or their workforce.
This update summarizes the 162 page final regulation and provides some initial thoughts that you may want to consider in dealing with this regulation.
When is this effective? December 1, 2016.
What does the new rule provide? The Fair Labor Standards Act (FLSA) and its regulations currently provide that salaried (as opposed to hourly) employees who don’t fit within certain job classifications and are paid more than $455 per week are not required to receive overtime pay for hours worked in excess of 40 hours. This rule has applied to businesses with annual sales in excess of $500,000.
Effective December 1, 2016, this $455 a week ($23,660 annually) increases to $913 per week ($47,476 annually). This will apply to all employees who are classified as ‘executive,’ ‘administrative’ or ‘professional’ under the FLSA; those definitions did not change.
Other changes in the new rule:
- 10% of the salary threshold can be met by nondiscretionary bonuses, incentive pay or commissions, as long as the payments are made at least quarterly. If the employee/company did not perform in a way to earn this bonus/incentive pay/commission in a particular quarter, the amount can be ‘caught up.’
- The new rule increases the annual salary level for ‘highly compensated employees’ (HCEs) from $100,000 to $134,004. HCEs can be exempt from the FLSA overtime rules even if they don’t fit all of the executive, administrative or outside sales rules. As in prior law, the full amounts of commissions/incentive pay/nondiscretionary bonuses apply to this rate. The 10% incentive compensation rule discussed immediately above applies to HCEs; but the bonus can be paid on an annual basis.
What types of employees does this rule not apply to? The following groups of employees, among others, are not subject to this rule. These exclusions are unchanged by the new rule.
- Outside sales employees
- Teachers—there are special rules for teachers at higher education institutions
- Certain computer-related workers who are paid at least $27.63 per hour
- 20% owners of the business in which they are employed
Other industries (for example, motor carriers) have special rules; those rules have not changed, although the increase in the salary requirement will apply to their employees who are subject to the FLSA.
Are the new rates fixed, and if so, for how long? The rates will be adjusted every three years, with the first adjustment to occur on January 1, 2020. The new rate is scheduled to be released no later than August 1, 2019.
What type of employers will be impacted? Any employer who has annual sales in excess of $500,000 must comply with the FLSA. There are other types of employers who may be subject to its rules, such as nonprofit entities.
The DOL believes that certain industries will be impacted by the new rule more than other industries. Industries that may be impacted include construction, wholesale trade, retail trade, transportation and warehousing, finance, insurance, professional and technical services, waste management and remediation services, educational services, hospitals and healthcare services, food services and public administration.
If my company is impacted, what should I be thinking about?
- Many employers, due to the nature of their businesses, do not use an attendance tracking system to monitor hours worked. Clients of this type may want to consider implementing some type of system if they may be subject to the new rule.
- If employers treat formerly salaried employees as hourly, decisions will need to be made about tracking time for certain functions—for example, how many hours does an employee work in a day when they are travelling for the employer, and how do you track hours worked at home after normal working hours. These rules should be communicated to employees in writing.
- How does an employer effectively track hours for a remote employee? Will the conversion of salaried employees to hourly result in more payroll expense?
- An employer who does not want to raise an affected employee’s salary to the $47,476 level should consider the following alternatives:
- Treat the employee as an hourly employee, and set the pay rate at a level that both meets the FLSA hourly rate and does not decrease the employee’s annual pay when considering the total number of hours that the employee typically works in a year.
- Treat the employee as an hourly employee, set the pay rate at a level that meets the FLSA hourly rate and monitor overtime. It may be more economical to limit the employee to 40 hours per week and hire another employee (full or part time) to fill the additional hours.
- Increase the employee’s annual pay to FLSA levels, but exclude the employee from any bonus programs and perquisites that are tied to the number of hours worked (some employers give salaried employees a day off for working more than a certain number of hours per week). Note that employees will still be covered by tax-qualified retirement plans.
- When an employee is converted from a salaried position to an hourly position, employers should consider the human resources (HR) impact of the change, both on benefit programs, and on employee morale.
This isn’t going away; I sense that it will be difficult for a politician in this election year to promote the rescinding of this regulation. Feel free to share this update with your HR and management teams to help them prepare for the new regulation. If you have questions, please contact me at firstname.lastname@example.org or 440-449-6800.