Over 40 Hours: Navigating the New Overtime Rules

On May 18, 2016 the Department of Labor released its final ruling for exempt employees. This has cause some confusion among employers, some of whom are wondering if they’re paying their employees correctly or if they need to switch their salaried staff members to hourly. We’ll take a look at a few scenarios, but first you need to understand what an Exempt employee is.

dreamstimemaximum_21661601What does “exempt” actually mean?

Exempt and Nonexempt are two classifications for employees. Under the Fair Labor Standards Act (FLSA), Exempt employees are excluded from overtime and minimum wage regulations that are in place to protect Non-exempt employees. To qualify for Exempt status, an employee needs to meet a test of duties (in one of the executive,administrative, or professional categories) as well as be paid a certain minimum salary.

I thought all salaried employees were exempt?

While it’s typically true that all Exempt employees are salaried, all salaried employees are not necessarily Exempt. You need to make this distinction clear in your employee manual, offer letters, and employee files to ensure compliance and keep everyone on the same page.

What’s changing with the new ruling?

Currently the minimum salary threshold you need to pay your Exempt employees is $23,660 per year, or $455 per week. The new salary threshold is increasing on December 1st, 2016 to $47,476 per year, or $913 per week. Additionally, you can now factor nondiscretionary bonuses, which are permitted to account for 10% of your Exempt employees’ pay. The duties tests have not changed.

How does this affect my practice?

Truthfully, it may not. If all of your employees are paid an hourly rate and you pay them 1.5x that rate for any hours worked over 40 in a one-week period, then nothing needs to change for you. The new threshold and regulation update only applies to Salary-Exempt employees who are paid less than $47,476 per year. Therefore, if you have Salary-Exempt employee who is paid more than the new threshold, you can keep them at their Salary-Exempt status with no change in salary. So, for example, if you have an exempt employee with a base salary of $45,000 per year and they receive $4,500 in nondiscretionary bonuses and commissions, you can count their annual salary as $49,500, which would be above the threshold. However, if you have an exempt employee with a base salary of $42,000 per year with $10,000 in nondiscretionary bonuses and commissions, you can only count $4,666 of the $10,000 as part of their annual ‘salary,’ because the remainder exceeds the 10% limitation. This would put their annual salary at $46,666, slightly under the required threshold.

dreamstimemaximum_25920752-scaledWhat if my exempt employees’ salaries do not meet the threshold?

If you have Salary-Exempt employees that do not meet the minimum salary requirement, even with commissions and bonuses, you have a few options:

Option 1 – If the employee regularly works overtime and their salary is close enough to the threshold, it may be worth giving them a slight raise to meet the minimum threshold in order to maintain their Salary-Exempt status and keep from paying them overtime.

Option 2 – If you have Salaried-Exempt employees who regularly work over 40 hours per week and meet the current salary threshold but would not meet the new threshold, and it is not worth giving them a substantial raise, there’s a way to do that without taking away the salary benefit. You can maintain these positions as salaried positions, however their classification would need to be Salary-Non-Exempt. For this classification you would take their annual salary and factor out how much is earned within the first 40 hours per week. Then, you lower their base salary and pay them overtime for any hours worked over 40 in a one-week period at what their hourly rate would be, also factoring in nondiscretionary bonuses. This way, they are receiving overtime payment to comply with the new regulations, but they would still be ‘salaried employees’ and you wouldn’t have to increase their pay. The benefit to doing this is that you can still advertise the position as a salaried, making it a more attractive position because the employees have the benefit of knowing they will be paid for at least 40 hours every week. Even if that base salary is technically lower than their old salary, they have the opportunity to close the gap and even make a little more by working overtime, a motivating factor for some.

If you have a Salary-Exempt employee who works over 40 hours per week, but not substantially so (say, 45 max), you could reclassify them as Salary-Non-Exempt, make them track their hours by clocking in, and prohibit them from work over 40 hours. It would be a bit of a raise for them, since they’d be working a few hours less per week for the same amount of money, but you could work out the formula I previously mentioned and adjust their salary down a bit to compensate if you were inclined. You would of course be responsible for paying them overtime if they work more than 40 hours, per regulation, but this method prevents that by strictly monitoring their schedule.

Option 3 – If the Salary-Exempt employee is nowhere near the threshold, giving them a raise isn’t feasible, and you don’t want to deal with the complications of Option 2, then yes, you’ll need to convert employee to a Hourly-Non-Exempt classification and require them to clock in, track time, etc. Divide their salary by the average number of hours worked and you’ll reach their hourly rate. With this change in status, if you want to avoid paying overtime, you would have to monitor their schedule and prevent them from working more than 40 hours per week. This may or may not be a functional option, depending on the position, so consider it on a case-by-case basis before panicking and converting your entire staff to an hourly rate.