Last week, the federal government announced changes to the overtime regulations included in the Fair and Labor Standards Act (FLSA) that will affect nearly every business owner. The most significant and most talked about change is the employee wage base.
Background: The FLSA excludes certain employees from federal minimum wage and overtime requirements. To qualify for an exemption, employees generally must: (1) be salaried, meaning that they are paid a predetermined and fixed salary; (2) be paid a salary that is at least equal to a specific threshold and (3) perform the executive, administrative, or professional duties set out in Department of Labor regulations, or the so-called duties test. These employees are considered “exempt,” and federal law does not require that they be paid the minimum wage or receive overtime for hours worked over 40.
Note that state laws may contain additional or more stringent requirements for an employee to qualify as exempt.
For many years, the salary threshold has been $455 a week or $23,660 per year. Commencing Dec. 1, 2016, in order to meet this base wage requirement, an employee will need to earn an annual rate of $47,476, which equates to $913 each week. Any employee not being paid at this rate will automatically be covered by the FLSA, must be paid for every hour worked, and is eligible for overtime at 1½ times his or her base rate for all hours worked in excess of 40 in a workweek. Your state’s overtime requirement may be more stringent.
Employers will be able to use nondiscretionary bonuses, incentive payments, or commissions to satisfy up to 10 percent of the standard salary level. If using this approach, these payments need to be made on a quarterly or more frequent basis. Determining whether a bonus will be nondiscretionary can be a complex undertaking, so small business owners are encouraged to seek the advice of their legal counsel in making such determinations.
Additionally, the annual wage base threshold will increase every three years with the first increase slated for Jan. 1, 2020. Despite soliciting comments regarding the “duties test,” the DOL has not made any changes to the current duties test (e.g., the DOL has not mandated that employees spend a specific percentage of time on identifiable exempt activities to be considered “exempt”).
This change in the FLSA regulations requires some analysis and decisions by every privately-held business. The financial impact of how to adjust the compensation of current exempt employees – who would be nonexempt under the new regulations – needs to be analyzed. The impact of any employee reclassifications on employee benefits and perceived change in authority needs to be addressed. The impact on hiring, advancement and employee work routine also needs to be considered.
There is no one-size-fits-all answer to the impact of this regulation change since each small business owner’s approach is different. We can help you with the financial aspects of these analyses, but your employment attorney should be consulted on any decisions which are made to comply with this change.
Changes to consider
What are your next steps? Here are five things business owners should consider:
- The employer needs to identify its exempt employees and determine their pay rates and weekly hours worked or expected to be worked.
- Calculate the estimated financial impact to your business and the employee of the various alternatives (increase salary to new exempt level or higher and possibly increase responsibilities, convert to hourly employee at a rate comparable to current annual salary, leave salary unchanged and pay overtime for all hours worked in excess of 40 per week).
- Consider the impact on employee benefits and employee practices (i.e. hours worked restrictions, retirement plan qualifications and contribution impact, health insurance, employer provided meal policy, break requirements, timekeeping requirements, etc.) of each alternative and decide which works best for you. All decisions need to be made while enabling retention of valued employees.
- After your decision is made, proper communication to the employee is critical to eliminate any perception of any change in employee status as being considered a demotion or loss of status. If a currently exempt employee is converted to non-exempt and paid hourly, the person responsible and accountable for the management of the employees’ time needs to be determined.
- Also, in this light, business owners need to decide if it’s appropriate to change the current management structure of its organization to either increase the responsibilities of those maintaining exempt status or hire more employees to decrease the overtime hours of those who are now non-exempt.
The Department of Labor is providing employers 200 days to come into compliance with the new rules. It would be wise to use this time to develop the most desirable means of implementing them, as the penalties for non-compliance are significant.
In addition, Congress is expected to attempt to amend this regulation change with less stringent employer requirements. If an amendment is attempted, it is expected that the President would veto the proposed legislation.
This article is provided for informational purposes only and everyone should always seek legal advice on any proposed changes to their employment practices.