Under the Fair Labor Standards Act (“FLSA”), overtime regulations require employers to pay time-and-a-half for hours worked over 40 within a given workweek. Certain employees are exempted from overtime pay if three requirements are met: (1) the employee is paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (known as the salary basis test); (2) the amount of salary paid meets a minimum specified amount (known as the salary level test); and (3) the employee’s primary job duties involve executive, administrative, or professional duties as defined by the regulations (known as the duties test).
The existing salary level is $23,660 per year. Effective December 1, 2016, this minimum salary level will be more than doubled, to $47,476 per year. This means that salaried employees who are paid less than this new salary level will now be entitled to overtime pay, regardless of their title, duties, or pay structure.
So how do you walk a client through these changes and what do they mean for the business?
Your client may choose one of a number of routes in addressing those employees and salaries impacted by the new salary floor. They may choose to: (1) increase salaries to meet the new threshold; (2) pay overtime for weekly hours in excess of 40; or (3) reduce hours to avoid overtime pay. In practice, this will require more than just shelling out more money.
Your client should start with an audit of which positions will be impacted by this new salary level and then conduct an evaluation of how many hours are typically worked by those employees. Once your client has a simple list of salaried employees who are below the new threshold, you can help to determine the best options.
1. Your client may maintain an employee’s exempt status, and the flexibility associated with that exemption, by increasing the yearly salary. Where your client is considering increasing salaries to meet the new threshold, the necessary increase should be compared against the cost of anticipated overtime hours.
Alternatively, your client could maintain the employee’s current pay rate and instead adjust his or her status to non-exempt. If the employee had been working over 40 hours a week, he or she must either receive overtime pay (for the same hours previously worked), or may see a reduction in hours (for potentially the same pay).
2. If the difference between the current salary and the required increase would justify switching an employee to hourly pay, your client could choose to offer a lower base hourly rate in order to offset anticipated overtime costs. For employees who no longer qualify as exempt, your client will also need to begin tracking the hours worked. Choosing to transition certain previously-exempt employees to hourly pay may prompt your client to reevaluate certain types of flexibility typically offered only to salaried employees, such as working from home, performing certain tasks before or after work, or having access to workplace systems outside of assigned hours. You may wish to walk your client through transitioning an employee to an hourly structure, as well as the administrative costs involved in tracking hours and schedules.
3. If your client wants to reduce employee hours to avoid paying overtime, you may wish to work with your client to evaluate business needs and consider hiring additional full time or part time employees at a regular rate of pay. Though additional man-hours will result in an outlay of hourly pay, hiring additional employees will address business and staffing needs without incurring higher salaries or overtime pay.
Current bonus and commission structures can now be taken into account when you are evaluating your client’s best options. Under the new regulations, the salary basis test has been modified to allow employers to count nondiscretionary bonuses and commissions to satisfy up to 10% of the required salary level. In order to qualify, such payments will have to be made to the employee at least quarterly. Those employers who pay significantly larger bonuses will still be capped at 10% and must still meet the remainder of the salary level requirements with traditional salary payments.
In addition, because this salary level will continue to be automatically updated every three years in order to ensure that the figure does not become outdated, you may wish to advise your clients about those anticipated future increases in advance.
Lastly, because the employment relationship is undoubtedly about more than just pay, it is important to counsel your clients through a broader range of impacts, such as the employer-employee relationship and employee morale. Many employees rank workplace flexibility highly when it comes to job satisfaction, so this may be as important of a consideration as the bottom line. Managing the rollout of these changes will be important to avoid giving some employees the perception of a demotion or an undeserved windfall. These changes may encourage your client to get more creative about how the work is accomplished; employers should not assume that the best way forward is to do everything the same way it was done in the past. Different roles, responsibilities, and benefits may be the best way to accommodate the new rules. Your client may wish to emphasize the fact that these changes could mean more compensation, more time with family, and better equity in pay for employees.