Earlier this year new overtime rules were published modifying the regulations under the Fair Labor Standards Act (FLSA). The final rules are effective December 1, 2016.
The rulings may impact the way you classify and compensate your employees.
What is Changing?
Here is a summary of the final rules:
- 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).
- A portion of certain bonuses count. For the first time, employers may use non-discretionary bonuses, incentive payments, and commissions, to satisfy up to 10 percent of the aforementioned minimum salary requirement, as long as these forms of compensation are paid at least quarterly.
- Increase for highly compensated employees. The minimum total compensation required for the highly compensated employee exemption will increase to $134,004 per year, which must include at least $913 per week paid on a salary basis.
- Automatic updates. There will be automatic adjustments to these minimum salary requirements every three years.
If you have exempt employees earning less than $47,476 per year, you may need to increase their salary or reclassify them as non-exempt and pay them overtime when due.
How to Comply with the New Overtime Rules
If your exempt employees earn less than the new salary requirement, they will no longer meet exemption criteria and must be classified as non-exempt and paid overtime whenever they work more than 40 hours in a workweek. An employee who meets all applicable exemption criteria, including the new minimum salary requirement, salary-basis test, and applicable duties test, may continue to be classified as exempt.
Options for Compliance:
If your exempt employees’ salaries fall below the new minimum, you will generally either have to:
- Raise their salaries:
Raise their salaries to the new requirement (if you elect this option, review employees’ job duties to ensure they continue to qualify for the applicable exemption). - Reclassify the employees:
Reclassify the affected employees as non-exempt and pay them overtime whenever they work more than 40 hours in a workweek.
Option 1: Raising Salaries
If an employee’s salary is closer to the current minimum ($23,660) and they rarely work overtime, it might make sense to reclassify them as non-exempt. To determine the cost of raising an employee’s salary to the new minimum, simply subtract the employee’s current salary from the new minimum ($47,476). Note: If you provide your exempt employees with non-discretionary bonuses, incentive payments or commissions, make sure you factor this in when calculating the potential costs of raising their salaries to meet the new requirement (10 percent of these payments can be used to meet the minimum salary threshold). Beyond the costs of raising exempt employees’ salaries, consider the impact on internal pay equity. Internal equity means employees are paid fairly when compared with other employees within your company. If you substantially increase some employees’ pay, other employees may have questions about why their pay isn’t increasing. Also remember that with the automatic increases, you would need to review and adjust (if necessary) exempt employees’ salaries every three years. If you currently offer regular merit increases, you will need to decide how you will handle those going forward in light of the automatic adjustments.
Option 2: Reclassifying Employees
If exempt employees don’t meet the new salary requirement, you can 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 your employees rarely work more than 40 hours in a week, you could reclassify them as non-exempt and convert their salary to an hourly wage (divide their weekly salary by 40 hours). If your employees regularly work more than 40 hours per week, simply converting their salary to an hourly wage would result in a significant increase in costs. However, assuming you have an accurate picture of the hours they work, you could keep your costs the same by accounting for the overtime premium in their new hourly wage. To take this cost-neutral approach, here is a simple formula you can use:
__________ _Weekly Salary_______________
40 hours + (Overtime Hours Worked Per Week x 1.5)
For 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 Worked Per Week 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).
If you have further questions, please contact our office at 479.466.9319. We’ll be happy yo help.