Recent Changes to Wage and Hour Law
On May 18th, 2016, the Department of Labor (DOL) released a final rule that dramatically increased the thresholds for overtime rules, increasing the number of employees eligible for overtime pay at time and one-half of their regular rate of pay for working more than 40 hours in a work week. To adequately understand the impact of this ruling and how it applies to businesses, one should have a general understanding of the Fair Labor Standards Act (FLSA) which governs minimum wage, overtime, minors and recordkeeping. Under the FLSA today, all employees are presumed nonexempt and eligible for overtime pay if they work more than 40 hours in a work week unless they meet specific exemption requirements of the Primary Duties Test (unchanged by the new DOL rule) and Salary Basis Test (significantly impacted by the new DOL rule). If an employee’s position meets the exemption requirements of both the Primary Duties Test and the Salary Basis Test, than they would be considered exempt and ineligible for overtime pay when they work more than 40 hours in a work week.
Primary Duties Test: For purposes of this article, I will assume this is common knowledge and refrain from going into heavy detail related to the Primary Duties Test other than to relay that in order for an employee’s position to be eligible for exemption under the Primary Duties Test, and therefore ineligible for overtime pay, the primary duties of their role must fall within six specified categories. The categories are defined as Executive, Administrative, Professional, Computer, Outside Sales People and Industry Specific. You may obtain more detailed information related to these categories by visiting the U.S. Department of Labor’s exemption fact sheet: https://www.dol.gov/whd/overtime/fs17a_overview.pdf. As I mentioned above, the recent DOL rule did not change these categories, therefore, if the primary duties of an employee’s role met the Professional category exemption previously (for example) and their role has remained the same, than they may continue to be classified in the “Professional” exemption category assuming their salary meets the Salary Basis Test which is defined in more detail below.
Salary Basis Test: If the employee’s position meets the criteria for the Primary Duties Test, then the Salary Basis Test requires that the employee be paid no less than $455 per week ($23,660 per year). Job titles do not determine exempt status. If the employee meets the “Professional” category exemption (for example) but is currently paid less than $455 per week, then they may not be classified as exempt and must therefore be paid overtime pay at time and one-half of their regular rate of pay for any hours worked over 40 in the work week. Essentially, to meet the criteria under the Salary Basis Test, an employee must be paid and have a guaranteed weekly salary regardless of the days or hours worked. Only the following employees are not required to be paid on a guaranteed salary basis: Outside Sales People, Doctors, Lawyers, Video film or Camera Positions, Certain Computer Professionals and Teachers.
As discussed above, effective on December 1, 2016, the minimum salary threshold for the Salary Basis Test doubles from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). Another change, which was not discussed above, impacts the exemption level for those deemed to be “highly compensated employees” in that the salary threshold for highly compensated individuals will increase from $100,000 to $134,004 annual salary.
In order to ensure they have the ability to adhere to the revised changes, it may be in an employer’s best interest to consider conducting an audit of their positions and determine if they pass both the Primary Duties Test and Salary Basis Test. Should an employee’s role meet the Primary Duties Test but not the Salary Basis Test, than they are considered to be a nonexempt employee and are eligible for overtime pay. Should the employee’s role meet the Primary Duties Test and the Salary Basis Test in that they are currently paid at least $455 per week ($23,660 per year), then this is acceptable until December 1, 2016 when the Salary Basis Test requires exempt employees to be paid at least $913 per week ($47,476 per year). This significant increase in minimum compensation for exempt employees is anticipated to impact employers dramatically in that they may need to make considerable changes if their currently exempt employees’ wages are less than $913 per week prior to December 1, 2016.
Some options to consider if a current exempt employee’s annual wage is less than the minimum salary requirement for exemption on December 1, 2016 which requires them to be paid at least $913 per week ($47,476 annually) are as follows:
- Raise exempt employee base salaries.
- Convert a position to nonexempt and prepare to pay overtime for any hours worked over 40 in a work week.
- Convert a position to nonexempt and adjust workload to keep hours at or below 40 in a work week to avoid overtime payment.
- Convert the position to nonexempt but reduce the hourly rate to compensate for overtime pay.
No matter which route an organization opts to take to meet the new DOL salary basis rule, communication will be critical. Once organizational direction is determined, one must consider how it will be implemented, what the message will be to impacted individuals, how much notice will be given and the impact it could have within the organization on employee morale. Communication is key and something that should receive thoughtful consideration.
I hope you found this informative as it relates to the changes which are effective on December 1, 2016. Should you have any questions or wish to discuss further, you are welcome to connect with me directly via phone at (952) 476-7103 or email at Rachael_Myers@copelandbuhl.com.