Surviving the Overtime Changes
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Surviving the Overtime Changes

By: Joanne Rinardo

Exempt Employees

Some employers have operated under the incorrect belief that if an individual was “salaried,” he or she was exempt from overtime. However, under federal regulations, exemption status is determined by both the employee’s job duties and salary, rather than how the employee is paid.

The “white-collared” categories of jobs -- Administrative, Managerial, and Professional -- are generally exempt from overtime pay. With only a few exceptions, to fall into one of these three categories, an employee must perform certain duties and/or have certain responsibilities (the “duties test”) and make a minimum weekly wage (the “salary test”). The Department of Labor (“DOL”) has raised the threshold for the salary test for exemption status. The duties test remains unchanged.

The salary threshold increase will impact 4.2 million U.S. workers out of the 22.5 million who are currently exempt. Of that 4.2 million, the change will have a greater impact on employees who do not have a college degree, and who are under 35 years of age, female, and non-white. It is also expected that the changes will impact some trades, i.e. the service industry, construction, and retailers, more than others.

The Changes

Effective December 1, 2016, the threshold for the salary test will increase to an income of at least $913 weekly ($47,476 annually). This is a significant jump from the prior $455 weekly wage requirement and is based on 35% of average weekly earnings.

  • Employees may use commissions and non-discretionary bonuses paid at least quarterly (up to 10%) to satisfy the new threshold.
  • There is no requirement to convert employees from salaried to hourly in order to calculate overtime pay. Employers, however, will be required to track the time of any non-exempt employees, irrespective of how they are paid.
  • The DOL will increase the salary threshold every three years. It is expected that the threshold will be raised in 2020 to more than $51,000.
  • Those professionals that were exempt from the salary test, such as doctors and teachers, will remain so, and are not entitled to overtime regardless of their salary.
  • The highly compensated employee’s salary threshold for exemption will be raised to $134,000 from $100,000. There is no duties test for this exemption.

Employer’s Options

Employers must decide how to classify those employees who are currently exempt but make less than the new threshold. Some options for addressing the threshold change include:

  • For those employees close to the new threshold, you may decide to raise the salary to keep the employee’s status as “exempt.” Keep in mind that in three years, that threshold will be raised again.
  • For other employees, you may elect to disallow overtime. If so, you must put into place a system to track all hours and make your expectations known to the employees in writing.
  • For employees well below the threshold who do not consistently work overtime, paying the occasional overtime may be the better economic approach.
  • Reduce the hourly salary so that, when overtime is added, weekly compensation remains unchanged. This approach may result in decreased morale or resignations of critical employees.

To ignore the change in the salary test, or not properly ensure compliance, could result in expensive litigation or the class action suits we have seen in the past. Note: it is helpful to have a written safe harbor directive that employees must immediately report any overtime pay errors.

Telecommuting

As mentioned above, one important result of the rule change is that employers will now have to monitor the hours worked by previously exempt employees whose wages remain below the new threshold. This will be trickier for those employees who work from home. Simply having a policy that the employee must not work more than 40 hours weekly, to avoid overtime, will not relieve the employer of monitoring the time the telecommuting employee works.

If you do not wish to pay overtime to the telecommuting employee, you must (1) limit and communicate the amount of hours that the employee may work on a weekly basis, (2) have a system to track accurately every hour worked from home, and (3) have the employee acknowledge in writing the hours worked weekly. Taking these steps should avoid a situation in which the employee underreports his or her hours, but later presents a claim for work done “off the clock” at overtime rates.

Recruiting

Some managerial and/or administrative applicants may see their new status as a non-exempt hourly employee less desirable because they will have to “punch a clock” and have less flexibility. On the other hand, some employees will welcome not having to work excessive hours for lower-than-expected pay. How you present the job will impact your ability to fill these critical positions. You might also consider changing how benefits, such as vacation, are accrued by these employees if non-exempt employees are usually treated differently.