On May 18, 2016, the Wage and Hour Division of the U.S. Department of Labor announced new rules relating to payment of employee overtime, to become effective December 1, 2016. The updated rules were adopted in large part to address concerns with the existing low salary threshold used in connection with identifying those executive, administrative and professional employees who are exempt from required overtime payments.
Whereas, “salaried-exempt” status presently applies to employees who, in addition to meeting the “duties test,” earn an annual salary of $23,660 (or $455/week), the new rules more than double the minimum salary to $47,476 annually (or $913/week). (Note: The duties test requirements remain unchanged.)
Although the changes do not go into effect for several months, employers would be well-served to consider how they will address overtime issues for those employees who presently are classified as “salaried-exempt” but receive an annual salary of less than $47,476. (Any employee presently qualifying as “salaried-exempt” earning a salary of $47,476 or more will continue to fall within the exemption for overtime payments … at least for now. Read on!) Employer options for addressing the new salary requirement include the following:
- Reclassify as non-exempt (and pay overtime to) those employees earning less than $47,476. Factors to be considered if this approach is selected:
- All affected employees must begin accurately tracking their hours worked (presuming they are not already doing so) for purposes of determining the amount of overtime worked (i.e. hours worked over 40 each week).
- Employers may (but need not necessarily) change the method of compensation for such employees from salaried to hourly.
- A change in the method of compensation from salary to hourly may impact employee morale, as some employees view their status within the company diminished by virtue of being paid hourly.
- In the event affected employees continue to be paid on a salary basis, when it comes time to determine the appropriate overtime rate, the salary must be converted to an hourly rate. For instance, if an employee earns an annual salary of $41,600 ($800/week) for a 40 hour workweek, her salary is properly converted to a $20 hourly rate. Assuming she receives no other form of compensation that would impact her “regular rate” calculation, the employee’s time-and-a-half overtime rate would be $30/hour for each hour worked in excess of 40 hours.
- Raise the salary of exempt employees to meet the $47,476 threshold. Beyond the obvious financial impact that awarding pay increases to affected employees may have on a business’ bottom-line, issues that should be considered include:
- “Up-the-chain” consequences of such pay increases. By way of example, if a 5-year employee earning $40,000 is increased to $47,476 so as to remain properly classified as salaried-exempt, the increase may require a consequent equivalent upward adjustment to the salary of a similarly situated 10-year employee earning $48,000. The domino effect of such salary adjustments may rapidly make this option unworkable.
- The salary increase required by the rules change is subject to further increase. Pursuant to the new rules, the salary threshold will automatically be adjusted every 3 years. As such, employers who intend to increase salaries in order to maintain employees’ salaried-exempt status must be prepared to make future upward adjustments in the years to come.
- Adjust employee schedules to eliminate the need for overtime. Although eliminating overtime may be more easily said than done, it is important to recognize that the direct financial impact of the rules change is avoided if employees work no more than 40 hours a week. By hiring additional workers (full- or part-time), reducing employee work schedules and/or carefully monitoring employees’ working hours, an employer can mitigate the impact of the rule change. Potential issues:
- Careful monitoring of hours takes time and effort and can create employee morale problems.
- While increasing the size of an employer’s workforce may assist in reducing overtime exposure, it may have the unintended consequence of increasing the employer’s exposure to other costly workplace laws. For instance, increasing the workforce to 50 employees may bring the employer within the purview of the federal FMLA (an increase to 75 employees has similar implications with respect to the Connecticut FMLA).
Given the significant impact that the FLSA rules change may have on employers’ operations, the time to grapple with this issue is now. With some advance planning, employers can select the method of compliance that will best serve their business and operational needs. Finally, employers may find this to be an opportune time to re-examine existing employee classifications to ensure the appropriateness of those presently classified as “salaried exempt.” Any employee found not to meet both the duties and salary threshold tests, must be classified as non-exempt and paid overtime.
Should you have any questions regarding the application of this rules change to your business, feel free to contact Brown Jacobson’s Employment Practices Group for further information.