- On May 18, 2016 the Department of Labor announced the final ruling on the FLSA Overtime Exemption.
- In order for employees to remain exempt from the overtime rules (commonly referred to as salaried), they must be paid a salary of at least $47,476 per year.
- Changes are effective December 1, 2016 assuming Congress does not overturn the ruling.
CHANGES MADE – NEW OVERTIME EXEMPT RULE
- Minimum Salary Threshold for Exempt Employees effective December 1, 2016.
- $913 per week, equivalent to $47,476 per year.
- Up to 10% of the Base Threshold Salary may be paid through nondiscretionary bonuses, incentive pay, or commissions (paid at least quarterly). This means one can pay a salary of $42,728.40 plus bonuses of $4747.60 to meet the Salary Threshold.
- Salary is based on 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage census region (currently the south).
- Highly Compensated Employees: Guaranteed salary of $134,004 per year.
- Automatic Updates to Minimum Salary Thresholds for exempt employees Every Three Years.
- DOL will provide notice of new salary threshold 150 days in advance of effective date.
WHAT ARE MY OPTIONS?
- Increase salary to minimum threshold of $47,476 per year, or pay a salary of $42,728.40 plus bonuses or commissions of $4747.60 to meet the Salary Threshold.
- Salary Compression: Be aware that other employees may see the increase in pay for one employee, in order to keep him/her salaried, as unfair. They may also want the same percentage increase in pay to remain equal.
- Reclassify salaried exempt employees as hourly.
- Track hours and pay time-and-a-half for overtime work.
- Alternatively, you could pay employees a “salary” and reduce or increase their pay, if their actual hours worked changes. Time-and-a-half is still due for overtime worked during the workday (greater than 12 hours for Colorado) or workweek (greater than 40 hours for Colorado), although if you do not authorize it, you may terminate the employee.
- NOTE: Timecards MUST be kept even if the employee remains on a “salary” and “works the same hours” each pay period. The Department of Labor will request to see timecards in the event of an audit.
- Training for Time Tracking:
- Easytrack offers an online timesheet and time clock option that can be used for hourly employees at a nominal monthly rate. Both services are very easy to use and integrated with Easytrack’s payroll software. Contact us for more information or to sign up.
- Easytrack has spreadsheet templates for timesheets available for clients. More can be found online through a quick search.
- There are many other online time tracking options to choose from.
- Transfer certain job duties of lower-paid, non-exempt workers to higher-paid, exempt workers to justify the higher salary of $47,476 and layoff those nonexempt workers. This will give the now higher paid workers more job duties and hours worked to make up for the higher salary. One can still keep within budget due to laying off the lower-paid, nonexempt workers.
- Transfer certain job duties of higher-paid, exempt workers to lower-paid, nonexempt workers to limit the amount of hours a higher-paid exempt employee needs to work.
- Combine Jobs/Increase Efficiencies so you have one or two employees doing what two or three employees used to do in order to justify increase in salary.
- Limit full-time hourly nonexempt workers’ hours to 40 per workweek and not more than 12 per day, and hire part-time workers (or an additional full-time worker) to cover extra work hours needed. This will be less expensive as one can avoid paying overtime for the additional work hours required.
- NOTE: To stay within budget, when converting employees from salary to hourly, the hourly wage rate could be set less to make up for the additional workers hired. Keep in mind the employee must be paid at least the minimum wage rate ($8.31/hour in Colorado for 2016).
- Keep more regular work hours and closely monitor hours worked so as to avoid inadvertently needing to pay overtime. Make certain employees account for all hours worked.
- Pay a lower wage rate, so when taking into account time-and-a-half for overtime hours, the annual total wages come out the same as when the employee was on salary. Keep in mind the employee must be paid at least the minimum wage rate ($8.31/hour in Colorado for 2016).
- Easytrack has a calculator available to help determine the equivalent hourly rate for a particular salary taking into account average overtime hours worked.
- Keep in mind the wage rate can’t be manipulated by repeated adjustments up and down to get the total wages to come out to a particular amount with each payroll. The wage must initially be set to whatever is desired (as long as it meets the minimum wage) and then left alone until the next wage increase.
- Adjust Total Value Compensate Package (Balance the Budget) to Offset the cost of Increased Wages
- The Total Value Compensation Package includes wages plus all the benefits such as vacation, sick, health insurance, 401(k), etc. and can remain relatively the same by paying less for certain benefits to offset higher wages.
- Offer a high-deductible, less expensive health insurance plan.
- Decrease the number of vacation days offered.
- Drop smaller benefits such as disability, life, and vision insurance. Every bit adds up and most employees focus on medical insurance.
- If employees are making more now, they can better afford to fund their own IRA (and still get tax breaks) versus the employer offering an expensive 401(k) or other retirement plan.
- Adjust the Workweek to best coincide with employee work schedules such that the minimal amount of overtime is paid. For example, instead of a Sunday through Saturday workweek, a Saturday through Friday workweek may be more advantageous depending upon when employees tend to work their extra days. Note: Workweeks must be 7 consecutive days. This has no bearing on the pay period.
- Be sure to establish a set workweek
- Overtime is paid based upon hours worked in a day and in the workweek. For Colorado, time-and-a-half must be paid for hours worked that are greater than 12 in a day or greater than 40 in a workweek.
- An employer can define the workweek as beginning any time/day desired, as long as it is a fixed and regularly recurring period of 168 hours – seven (7) consecutive 24-hour periods. For example, the workweek could be:
- From 12:00am Sunday morning to midnight the following Saturday.
- It does not matter what the pay period is, overtime must be paid on the established workweek.
- Hourly nonexempt employees cannot flex their hours without being paid overtime!
- For example, if an employee only works 39 hours one week, and the employee then works 41 hours the next week to make up the time, overtime must be paid for the 1 hour worked over 40.
- Telecommuting and “After Hours” work for hourly nonexempt employees:
- Keep in mind if an hourly nonexempt employee checks email or takes a phone call at home “after hours,” the employee needs to be paid for that time, even if it’s just a “quick minute” to do so.
- It’s recommended that telecommuting employees who are hourly nonexempt, work in blocks of time so hours can be more accurately tracked than if they check email here and there as a salaried employee might.
Fair Labor Standards Act (FLSA) establishes minimum wage and overtime protections to employees.
To be considered “exempt,” employees must meet three (3) requirements:
1. Duties Tests – These tests have NOT CHANGED
- Primary duty is management of the business.
- Directs work of two (2) or more employees.
- Authority to hire/fire/make recommendations.
- Primary duty is office/non-manual work.
- Directly related to management or general business operations.
- Exercises discretion and uses own judgement.
- NOTE: A “clerical” position where the employee is given specific orders or lists of work to carry out, does not qualify as Administrative.
- Learned: Advanced knowledge, education required
- Creative: Artistic, imaginative
- Primary duty is making sales, obtaining orders/contracts for services.
- Employed away from the employer’s place of business.
- Computer Workers: Computer-related occupations.
2. Paid on Salary Basis – This has NOT CHANGED
- Cannot reduce pre-determined pay amount based on quality of work or quantity of work (number of hours worked).
- Full salary due, if any work (no matter how few hours) is performed in the workweek.
3. Minimum Salary Threshold – THIS WILL CHANGE Beginning December 1, 2016!
- Current (old) Amount: $455 per week or $23,660 per year.
- Current (old) Salary Includes: Base salary must meet minimum threshold. (i.e., does not include Bonuses or Commissions).
- Current (old) Highly Compensated Employee (HCE) Salary Threshold: $100,000 per year.
DOES THIS AFFECT ME? SHORT ANSWER IS YES
- Applies to any business/employee that is covered under FLSA:
- Annual sales greater than $500,000.
- Engaged in interstate commerce.
- Engaged in interstate commerce, or production of goods for commerce.
- Interstate commerce includes: email/phone call to someone in another state, order/receive/use goods from out-of-state vendor, credit card transactions of any sort, use of the internet, etc.
- Very few businesses or employees do not perform one of these actions. Most perform one of these actions and are therefore covered under the FLSA.
- There are NO exceptions for small businesses or non-profits.
- There is an exception for business owners who own 20% or greater stock or interest in the company.
- If you think it does not apply to you, consult an attorney.
- Dept of Labor - Wage and Hour Division - Final Rule: Overtime
- Dept of Labor - Wage and Hour Division – Small Business Guide
- Dept of Labor - Wage and Hour Division – Guidance for Nonprofits