As most everyone has heard, the Department of Labor finally released the updated Overtime regulations of the Fair Labor Standards Act that will take effect later this year. The changes to the salary level threshold for employees to be classified as Exempt are long overdue, but it seems the DOL is trying to make up for lost time by more than doubling the salary level threshold at one time.
The primary change the DOL made was to increase the salary level threshold to $47,476, which is set at the 40th percentile for wages across the United States. It is important to remember that this minimum salary for an employee to be exempt from the overtime requirements is only one of the three burdens or tests (and represents one of the easiest and cleanest tests of the three) that an employee must meet. Additionally, employers will now be allowed to include up to 10% of the salary threshold amount in non-discretionary bonus money provided certain conditions are met.
Any employee that does not meet the three requirements from exemption must be paid overtime pay at the rate of one and a half times his or her normal base rate for any hours worked in excess of 40 in the employer’s designated pay week. In order to be considered exempt from this overtime premium requirement, the employee must meet all three of the following tests:
- Salary Basis Test – The employee must be paid salary.
- This means that he or she must be guaranteed a set amount of money each week regardless of how much he or she works.
- Employers are allowed to offset full days of pay for salaried employees provided that the employer has a clearly defined Paid Time Off (PTO) policy that provides for some amount of paid time off and states how full days may be offset for by the employer if the employee has exhausted his or her PTO.
- Salary Level Test – As of 12/1/16, the employee must be paid at least a minimum of $47,476 per year.
- The current minimum salary amount through November 30, 2016 is $23,660. This rate had not been adjusted in many years.
- This rate will now adjust every three years to keep pace with wage and inflation growth.
- For the first time, the Department of Labor has defined how non-discretionary bonuses may be included in this Salary level for up to 10% of this basis. In order to do so, the following conditions must be met:
- The bonuses must not be discretionary. This means there must be a clearly defined policy for how these bonuses will be met (% of sales, clearly defined objectives, etc.)
- The bonuses must be paid out at least quarterly.
(On a related note, for the past five years EctoHR has maintained a non-discretionary incentive plan based on Companywide profitability targets and has found it to be a great motivator for employees. For more information on this plan, please contact us.)
- Administrative Duties Test – This is often the most challenging test to meet for employees that are on the edge of being exempt. For this test, one of the following standards must be met:
- Executive – Does the EE regularly supervise two or more other EE’s? Is management a primary job duty? Does the EE have a genuine impact on the job status of others, including hiring, firing, selecting, training, setting rates of pay, etc.? If the answer to all of these questions is yes, then the employee meets the Administrative Duties Test under the Executive/Management area.
- Professional – Certain types of work/positions are exempt by their nature, provided they meet the Salary Level and Basis test. Does the position require special knowledge, advanced education, etc.? Examples of positions that likely meet this threshold include Lawyers, Doctors, Dentists, Teachers, CPA’s/Accountants (not bookkeepers), Engineers, etc.
- Administrative – This title is the most “misleading” and often is where employers get themselves into trouble. Does the EE perform administrative duties that are essential and related to running the business? (This is not administrative like clerical or secretarial work) Does the work involve matters of significance? Does the employee use discretion and judgment in the course of his or her duties? An example includes someone in Purchasing who has the authority to select vendors and suppliers for major purchase items that are integral to running the business, but not the person that simply orders office supplies from a predetermined vendor.
EctoHR is currently in the process of reviewing the Exempt vs. Non-Exempt status for employees of its clients and is pleased to report that this change impacts a fairly small number of employees across all of our clients. For our ongoing HR outsourcing and HR consulting clients, we will be proactively reaching out to each client to conduct a review of any employee that is in question.
If your company has not seen or used EctoHR’s FLSA exemption worksheet or needs additional information and advice on how to treat your employees under the new FLSA regulations put out by the Department of Labor, please contact EctoHR at hr@ectohr.com or 810.534.0170.