5 Options For Responding To The New Salary Levels For Exempt Employees

2016-06-06-1465250638-1640443-bigstockWorkingOvertime78902144.jpg

Since May 18, 2016, there have been numerous articles addressing the new Fair Labor Standards Act (FLSA) Overtime rules. The Department of Labor (DOL) had been working on these revisions since 2014. As part of the process, the DOL took public comments and received over 270,000 responses before issuing the proposed regulations on May 17th.

The current FLSA was last revised in 2004; prior to that, the last revision had been 1975. Because the world and the workforce has changed significantly since both those dates, it was argued that the current definitions and salary levels were out of date.

Changes in the New Regulations

Briefly, what was changed in the new regulations was the minimum salary level that has to be paid to a currently exempt employee in order for them to meet the first step in being considered "exempt" from being paid overtime. The current minimum salary level is $455/weekly ($23,660 annually) and under the new regulations, it will become $916/weekly ($50,440 annually). The new salary level will be in effect on December 1, 2016.

IMPORTANT NOTE: Some state laws require a higher minimum salary level and before making changes to meet the federal standards, check your local state regulations.

The second consideration in the classification process is the "Duties Test." This means that the employee must be performing a specific set of duties to be considered ineligible for overtime. This article will not address this factor, but you can find detailed information here. The next article will provide more information on this topic, but here is a Comparison Table addressing the Current Regulations, the Proposed Rule and the Final Rule.

Impact on Non-profit Organizations

Non-profit organizations are NOT exempted from complying with the FLSA regulations. Non-profits are required to follow the same rules for classifying employees and paying the minimum salary levels. The DOL has published guidelines for nonprofit organizations here.

5 Options to Respond

While approximately 60 percent of affected employees do not work overtime, so no changes need to be made. For those that do work some overtime, employers have a range of options for responding to the updated standard salary level. For each affected employee newly entitled to overtime pay, you may:

  1. Increase the salary of a current employee who meets the duties test to at least the new salary level to retain his or her exempt status. For example, if the affected employee consistently works over 40 hours each work week, this might be the best choice in order to eliminate the need to pay significant dollars in overtime pay.
  2. Pay overtime above the salary at one and a half times the regular rate of pay for any overtime hours worked. If the affected employee does not accrue substantial overtime hours, keeping the current salary level would require payment of overtime, but the dollar amount might not be significant enough to warrant the raise in base salary.
  3. Reduce or eliminate overtime hours. By reorganizing workloads and work schedules, it might be possible to retain the affected employee's current salary without incurring extra overtime pay. Also, if the employee works periods outside of the normal work day or work week, the schedule can be arranged to arrive at work later in the day or substitute a Saturday for a Friday in order to keep the hours worked at 40 in the work week.
  4. Reduce the amount of pay allocated to base salary (provided that the employee still earns at least the applicable hourly minimum wage) and add pay to account for overtime for hours worked over 40 in the work week, to hold total weekly pay constant. For example, an employee who meets the duties test for exemption earns $37,000 per year ($711.54/weekly). She regularly works 45 hours each week. The employer can pay her an hourly rate of $15 and pay time and one-half for the 5 overtime hours or $712.50/weekly. Or, the employer can pay a weekly salary for 40 hours of $600 and pay the overtime for 5 hours or $112.50 or $712.50.
  5. Use some combination of these responses.

What Impact Can This Have?

The circumstances of each affected employee will likely influence how employers respond to this Final Rule. For example, employers may be more likely to give raises to employees who regularly work overtime and earn slightly below the new standard salary level, in order to maintain their overtime-exempt status so that the employer does not have to pay the overtime premium. For employees who rarely or almost never work overtime hours, employers may simply choose to pay the overtime premium whenever necessary. Additional guidance can be found in the Wage and Hour Division's Small Business Guide.

Nothing in the rule requires employers to change employees' pay to hourly from salaried, even if the employees' classification changes from exempt to overtime eligible. Employers may choose one or more of the options above while continuing to pay newly overtime eligible employees on a salaried basis.

Next Steps?

You will want to get started sooner rather than later on reviewing which employees may be affected by these changes. The time will pass quickly and December 1st is just around the corner.

Remember, you DO NOT NEED TO START PAYING EXEMPT EMPLOYEES OVERTIME TODAY if they make less than $50,440. You do need to be prepared to do so on December 1st. Today you need to determine to whom changes need to be made and what are the parameters that have to be considered around making those changes.

Margaret Jacoby, SPHR, is the founder and president of MJ Management Solutions, a human resources consulting firm that provides small businesses with a wide range of virtual and onsite HR solutions to meet their immediate and long-term needs. From ensuring legal compliance to writing customized employee handbooks to conducting sexual harassment training, businesses depend on our expertise and cost-effective human resources services to help them thrive. This article first appeared on the MJ Management Solutions blog.

Let's connect: LinkedIn | Twitter | Facebook | Google+