In 2014 President Barack Obama asked the U.S. Department of Labor to modernize the Fair Labor Standards Act (FLSA) minimum wage and overtime protection rules. The DOL subsequently issued a proposed rule that would raise the FLSA annual salary threshold for the overtime exemption – that is, the minimum salary required for an employee to be classified as exempt and therefore not eligible for overtime pay. The DOL opened up the proposal to public response and received close to 300,000 comments.
The Final Rule
On May 18, 2016, the DOL announced the final rule, which will:
- Increase the annual salary threshold for exempt salaried executive, administrative, and professional employees from $23,660 to $47,476 starting December 1, 2016. Nondiscretionary bonuses and incentive pay, including commissions, may account for up to 10 percent of that amount if paid at least quarterly.
- Raise the annual salary threshold for exempt highly compensated employees from $100,000 to $134,004.
- Automatically increase the annual salary threshold every three years beginning January 1, 2020.
Note that raising employees’ salaries to the threshold doesn’t necessarily mean they’re exempt from overtime pay. The employee must also be paid on a salary basis and perform specific duties, both as defined by the FLSA, to qualify as exempt. No changes were made to the FLSA salary or job duties tests.
General Preparation Strategies
Most employers will need to reexamine certain jobs and make modifications where necessary. Ed Adams, Executive Consultant of EBS Consulting, an HR management consulting firm recommends the following approach:
- Review the current salaries of exempt employees and compare them to the proposed salary threshold.
- Determine which salaries you can raise to retain exempt status – such as those on the cusp of the threshold. In this case, the employee must also meet the duties test.
- For salaries that you can’t raise, make the switch to nonexempt status and pay overtime or limit hours to 40 per week. You can look at flexible work schedules and work hours then decide whether you need to bring in part-time help.
“It’s important to note that while all employers should complete a careful review of exempt status, salaries and hours worked, most employees will not be affected by this new rule,” said Melanie Crow, Senior Vice President of Sales & Marketing for Inova Payroll, a national payroll and HR provider based in Nashville, Tennessee. “Only a small number of employees regularly work overtime hours.” According to the Wage and Hour Division of the Department of Labor, 20 percent of employees work overtime on a regular basis and another 19 percent work some overtime.
Adjusting to Change – High-Impact Sectors
The new overtime rule impacts all employers covered under the FLSA; however, sectors that tend to pay lower salaries will be most affected. “Fast food restaurants are going to have to hold employees at 40 hours, readjust their schedules, maybe hire a few part-time people, but they’re not going to be raising salaries,” said Adams.
While fast food restaurants are looking at the change from a scheduling perspective, nonprofits are viewing it from a reduction-in-services perspective. “Nonprofits can’t automatically increase their budgets,” said Adams. “They’re living on tax dollars, voluntary contributions from individuals, endowments, or interest on endowments. They’re a different game altogether.”
Additionally, it could be difficult for nonprofit employees who enjoy putting in extra hours for the cause to adapt to fewer hours. Adams noted, “People don’t usually go into the nonprofit world because they want to make a lot of money. They tend to have a heart connection with that organization; some compelling reason through their history or family history that makes them want to be of help.”
Potential Impact on Employees
“The new rule will affect employees in different ways.” said Crow. “For some it will be a positive change such as a salary increase up to the threshold or additional income from overtime. For others it may mean adjusting to punching a time clock or having hours cut to 40 per week with new part-time workers brought in to work the additional time needed. It’s going to be an adjustment.”
Employees are naturally concerned as to how the change will affect them, and managers will need to encourage honest and open communication. “I think explaining that employers don’t have any option but to comply is the first thing.” said Adams. Managers should encourage feedback, Adams stated. “Get their input so they feel like part of the solution.”
Change is coming, and how employers react to it will determine whether they have a successful transition. “Now is the time to start doing an internal analysis, before this rule goes into effect,” Adams advised. A complete reevaluation of exempt and nonexempt classifications, including applying the duties test, may turn up misclassifications that can be corrected as part of the overall process of complying with the new rule. Misclassifications can be costly so it’s a good idea for employers to seek the counsel of an employment attorney or human resource expert to ensure compliance and a seamless transition. Additional information for employers about the FLSA overtime rule can be found here.
Grace Ferguson is a freelance writer with 10 years of experience in payroll and benefits administration.
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