Earlier this year, the Department of Labor announced it will be raising the salary threshold for overtime exempt employees. Under the new ruling, employees must earn a minimum of $47,476 per year or $913 a week. This is a significant jump from the previous threshold of $23,660 per year or $455 per week.
These changes are scheduled to go into effect on December 1, 2016.
As December 1 is fast approaching, it is time to evaluate what your business can do to remain in compliance with the upcoming FLSA overtime rule changes or face hefty fines and penalties from the Department of Labor.
1. Review Your Current Employees
The overall financial cost of this change to your company will be based on how many employees these changes affect. This is why the first step business owners need to make when determining how to prepare for these changes is to evaluate their staff and see who is currently classified as overtime exempt. How many hours do they typically work in a workweek? Do these employees really need to be exempt from overtime? Does the individual employee earn between $23,660 and $47,476 per year?
You will also need to determine whether or not the job requirements for the individual employee fall within the parameters of The Duties Test for overtime exempt employees set by the FLSA.
The Duties Test
The Duties Test is what the FLSA uses to determine whether or not the job requirements for an individual position qualify as overtime exempt. Unlike the salary threshold, The Duties Test under FLSA remained unchanged moving forward. The duties vary by job classification:
- Executive: Manages the enterprise, directs the work of two or more employees, has authority to hire or fire
- Administrative: Does office or non-manual work, directly related to management or general business operations, exercises discretion and independent judgment in matters of significance
- Professional:
- Learned Professional – Advanced knowledge in field of science or learning
- Creative Professional – Invention, imagination, originality, or talent in recognized field or artistic or creative endeavor
- Computer: System analyst, programmer, computer engineer and similarly skilled employees, does not apply to the manufacture or repair of computer hardware or heavy use of computers
- Outside Sales: Salary requirements do not apply, makes sales or obtains orders or contracts for services, customarily and regularly engaged away from the employer’s premises or place of business
- Highly Compensated: Must perform office or non-manual work, must customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee.
For more information on The Duties Test as outlined by the FLSA and Department of Labor, visit https://www.dol.gov/.
2. Evaluate Current Work Loads
Another important aspect to consider when evaluating the impact of the rising salary threshold for overtime exempt employees is whether or not you need to adjust employees’ workloads. This can include redistributing specific duties so the employee no longer passes the above-mentioned duties test, or hiring additional staff to combat the need for overtime.
Both of these options will help ease the need to raise your employee’s salary while remaining compliant with the upcoming FLSA overtime changes. Although hiring additional staff may seem expensive at first, it may actually end being more cost effective at the end of the year when you consider the amount of overtime you would need to pay one employee to complete the assigned tasks.
In addition to employers evaluating how work is currently being completed, individual employees also need to evaluate their work routine. For example, if an employee who is currently classified as overtime exempt is accustomed to answering phone calls or emails past the regular work day or working weekends, he or she may no longer have that window to get work done if he or she is reclassified as non-exempt. The non-exempt status means that any time spent working beyond the standard 40 hours in a workweek requires overtime pay.
3. Compare The Financial Cost Of Maintaining An Employee’s Exempt Status to Paying Overtime
For most employers, automatically raising individual employee’s salary to meet the new threshold requirement may not be feasible. This is is why it is important to consider the different options available to you under the new FLSA overtime rule changes.
The way you do this is to evaluate how much it would cost you per year to raise the employee’s salary to meet the new minimum requirement to how much it would cost you to keep the employee’s pay at what it is and begin paying overtime.
For example, if the employee works an average of 6 hours of overtime a week and makes $39,000 a year, you would end up paying him or her an extra $8,775.56 per year if you had to pay overtime. However, if you increase the employee’s salary to $47,476, the extra cost would be $8,476 per year, roughly $300 less than the total cost with overtime.
This amount will vary based on the overtime hours worked by the individual employee. It may be more cost-effective for employers to pay overtime to current salary exempt employees who do not typically work much overtime.
Non-Discretionary Bonuses & “Catch Up Pay”
To help employers adjust to the increased salary for employees, the Department of Labor has built in an option to the FLSA overtime rule changes that allow businesses to count non-discretionary bonuses and incentive payments to be used to satisfy up to 10 percent of the new standard salary requirements. These “catch-up” payments are to be paid to employees who remain classified as exempt but whose salaries fall below the new threshold at the end of each quarter.
Businesses have one pay period after the end of the quarter to make these payments to the employees or the individual will qualify for overtime pay for the extra hours worked.
For example, say a salary overtime exempt employee is only paid $11,182.10 during the first quarter of the year; however, the new standard salary levels requires him or her to be paid at least $11,869.00 for the 13 week period. The employer must now either pay the employee the difference of $686.90 or pay the employee overtime for all the hours he or she worked above 40 in each other the 13 workweeks.
4. Adopt A Time-Tracking System and Policy
One of the easiest ways to keep track of your employees’ hours under the new FLSA overtime rule changes is to begin using a time-tracking system, such as the TimeAmerica service offered by INVO PEO. Not only will this software make it extremely easy to monitor your employee’s hours and take note of those who regularly work over 40 hours in a workweek, it also helps you remain compliant with other federal regulations, including ACA compliance.
Other benefits to using this style of software include:
- The ability to monitor attendance
- Track paid time off
- Set schedules
- Allow remote clock-in/clock-out for employees who work outside of the office
- Compare employee’s performance to hours worked
