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Effective December 1, 2016, new rules will substantially increase the minimum salary required to be exempt from overtime under the Fair Labor Standards Act (FLSA). If you have exempt employees who earn less than the new minimum, you will need to take action. Here is an overview of the rules and steps to take before December 1.
Background:
While most employees are “non-exempt” (entitled to minimum wage and overtime), the FLSA provides for exemptions from its minimum wage and overtime requirements for certain administrative, professional, executive, outside sales, computer professional, and highly compensated employees. To be considered “exempt,” employees must generally satisfy three tests:
- Salary-level test: Employees must earn a weekly salary that meets or exceeds the minimum requirements.
- Salary-basis test: With very limited exceptions, the employees must receive their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test: The employee’s primary job duties must meet certain criteria.
What Is Changing?
Here is a summary of the final rules, effective December 1, 2016:
- Salary increase for certain exemptions. The minimum salary requirement for the administrative, professional (including the salaried computer professional), and executive exemptions increases from $455 per week to $913 per week ($47,476 annually).
- Total compensation increase for highly compensated employees. The minimum total compensation required for the highly compensated employee exemption increases from $100,000 to $134,004 per year, $913 of which must be paid on a weekly salary basis.
- Automatic updates. There will be automatic adjustments to these minimum salary requirements every three years, beginning January 1, 2020.
- Non-discretionary compensation. For the first time, employers may use non-discretionary bonuses (generally those announced or promised in advance), incentive payments, and commissions to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. For more information, see How Bonuses Can Help You Meet the New Salary Requirement.
Options for Compliance:
If your exempt employees’ salaries fall below the new minimum, you generally have two options:
Option 1: Raise Salaries
The first option is to raise exempt employees’ salaries to the new requirement (if you elect this option, review employees’ job duties to ensure they continue to qualify for the applicable exemption). To determine the cost of raising an employee’s weekly salary to the new minimum, subtract the employee’s current salary from the new minimum ($913 per week). If applicable, factor in nondiscretionary bonuses, incentive payments or commissions (10 percent of which can be used to meet the new minimum).
Option 2: Reclassify Employees
If exempt employees don’t meet the new salary requirement, the other option is to reclassify them as non-exempt and pay them overtime (1.5 times their regular rate of pay) whenever they work more than 40 hours in a workweek. If you choose this option, also check your state law for any additional overtime requirements that may apply to your employees.
To determine their hourly wage, divide their weekly salary by 40 hours. However, if they regularly work more than 40 hours per week, you’ll need to account for the overtime premium in their new hourly wage to keep your costs about the same. Consider this formula:
| Weekly Salary / [40 hours + (Overtime Hours Worked Per Week x 1.5)] |
Example: An exempt employee’s current salary is $715 per week, the employee regularly works 50 hours per week, and you want to convert this employee to an hourly employee but keep your costs the same. You would calculate the hourly wage as follows:
| $715 weekly salary / [40 hours + (10 overtime hours x 1.5)] = $13 hourly rate |
This employee would be paid $13 per hour for the first 40 hours and $19.50 per hour ($13 x 1.5) for each hour of overtime. Remember, whatever hourly rate you decide to pay reclassified employees, it must meet or exceed the highest applicable minimum wage (federal, state, or local).
Steps to Take Now:
- Have a plan in place. If you haven’t already done so, decide what your company will do to comply with the new rules. Remember, you don’t have to choose the same option for all employees. Depending on their typical work hours, it may make sense to reclassify some employees as non-exempt and raise other exempt employees’ salaries to meet the new minimum (provided they still satisfy the duties tests).
- Communicate changes. Once you have decided what changes you will make, communicate them to impacted employees as early as possible. Check your state law for any specific time-frames for providing such notice. For more information communicating these changes to employees, see How to Communicate Changes to Employees.
- Review timekeeping practices. If you will be reclassifying employees to comply with the new rules, ensure that you have systems in place to accurately record all work hours. Under the FLSA, hours worked includes not only time actually spent working, but also certain nonproductive time, such as rest breaks, travel time, and training time. Exempt employees may not be accustomed to tracking this time and may be used to working after hours. Train them on your timekeeping policies and procedures and expressly require employees to record all working time.
- Implement changes by Dec. 1. Employees who will remain exempt must receive a salary of at least $913 per week by December 1, 2016. However, many employers don’t have workweeks that will begin on December 1, 2016, which is a Thursday. In such cases, the best practice would be to implement salary increases at the beginning of the workweek so that exempt employees are paid at least $913 for the workweek that includes time worked on or after December 1, 2016. If you intend to apply nondiscretionary bonuses toward meeting up to 10 percent of the salary requirement, make sure you provide the bonus within 13 weeks of December 1, 2016. For employees reclassified as non-exempt, make sure you pay them at least the minimum wage for all hours worked and overtime whenever they work more than 40 hours in a workweek. Note: Your state may require overtime in additional circumstances. Check your state law for more information.
If you have questions, please contact Victor C. Belgiorno at 516-861-3704 or .