The U.S. Department of Labor’s (DOL) Final Rule updating regulations raising the minimum salary for white-collar exempt employees under the Fair Labor Standards Act (FLSA) becomes effective December 1, 2016. Is your business ready? Below are some strategies you can use to help your business become fully compliant.
The FLSA requires covered employers to pay an overtime premium for hours worked in excess of 40 in a workweek at the rate of 1.5 times the regular hourly rate of pay for any employee who is not exempt.
Which of your employees may qualify as exempt from overtime?
To claim a white-collar exemption from overtime pay, an employer must:
1) Pay the employee a salary at or above the minimum salary level, which is currently $455/week ($23,660/year), but will increase to $913/week ($47,476/year) on December 1 (Highly Compensated Employees are raised to $134,004/year);
2) Pay the employee a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work; and
3) Ensure that the primary duties performed by the employee align with one of the white-collar exemptions (executive, administrative, or professional).
How can you get ready for December 1?
Audit your work force. Consider undertaking a work-force audit to see which of your employees may need to be reclassified under the Final Rule. Consider whether your job descriptions are accurate to ensure your employees meet one of the duties tests.
What comes next after you decide who your exempt employees are?
Employers have many options for compliance with the Final Rule. Not all of them will necessitate changes in your current pay practices.
1. No change needed. For some employees, you may determine that no changes are needed. This would be the case if you have an employee who is white-collar exempt, earns between the old and new salary levels and never works more than 40 hours per week. Without overtime, the Final Rule will have no real effect on this employee, and you can continue to pay a salary as before.
2. Raise salaries. Consider raising the salaries of employees who are white-collar exempt, paid a salary near the new salary level, but regularly work overtime. The cost of the salary increases will be less than the cost of anticipated overtime.
3. Pay salary and overtime. It may be prudent to pay some employees a salary that covers a fixed number of hours, with overtime pay for work hours above the agreed number. The DOL offers these examples:
A) Manager earns a fixed salary of $41,600/year ($800/week) for a 40-hour workweek. The regular pay rate is $20/hour. Manager works 45 hours one week. Manager is due an overtime premium of $30/hour (1.5 times $20) for each of the five hours over 40.
B) Manager is paid a fixed salary of $44,200/year ($850/week) for a 50-hour workweek. The fixed salary does not include the overtime premium. Manager’s regular pay rate is $17/ hour ($850/50 hours). In a 50 hour workweek, Manager would earn an additional 0.5 time overtime pay for the 10 hours above 40. The entire 1.5 time overtime premium would be due for hours above 50.
C) FLSA regulations permit an employee to be paid a fixed salary that covers all of the hours the employee works during a workweek, which would remain the same whether the employee worked 20 or 50 hours. The employee’s regular hourly rate of pay will fluctuate by the week. The employer is responsible for payment of only the 0.5 overtime pay premium for any hours worked in excess of 40, with the overtime rate determined by the fluctuating regular hourly rate of pay. Consider carefully the strict requirements that must be met to ensure compliance with FLSA regulations for a fluctuating workweek. 29 C.F.R. § 778.114.
What should you take away?
You still have time to undertake your workforce audit, determine which of your employees will still qualify for one of the white-collar exemptions, and consider your options for complying with the Final Rule. Get started! December 1, 2016 is approaching quickly.