Earlier this year we brought to your attention proposed overtime regulations from Department of Labor that would significantly impact your small business by substantially increasing the amount of overtime dollars you pay out. Labor released its final ruling last week, and employers only have until December 1, 2016 to comply. The time to act is now.
The key provisions of the final ruling are as follows:
- Exempt employees must earn a salary level of at least $47,476 ($913/week): Exempt employees must still be paid a salary, but the minimum salary threshold will almost double to $47,476 per year. This marks a substantial increase in salary requirements for exempt employees. To ensure compliance, you will need to look at all of your exempt employees currently earning less than $47,476 and assess 1) whether you remain comfortable that the duties performed satisfy the exemption requirements; and 2) if the duties test is satisfied, determine if it would be more cost effective to increase the salary level or pay overtime to those employees.
- Highly Compensated Employees: The separate exemption for "highly compensated employees" (where the employee need only perform one of the exempt duties or responsibilities to satisfy the exemption) remains, but will now apply to employees whose annual salary is more than $134,004. This is $34,000 more than the current level and $12,000 more than proposed. This is one of the bigger surprises and means that fewer employees will qualify for the reduced duties test.
- Salary level indexed every three years: The final regulation calls for updating the salary level every three years, beginning January 1, 2020. With each salary change, employers will again need to examine whether it remains confident that the duties test is satisfied, and, if so, whether the employer wants to again increase the salary level or forego exemption. This reexamination of classifications every three years is likely to result in even more non-exempt employees over time. (This is subject to legal challenge as it is unclear whether the Fair Labor Standards Act gives DOL the authority to index. We need to go with it for now though.)
- Inclusion of nondiscretionary bonuses and incentives: For the first time, the DOL will allow employers to satisfy the salary level test with non-discretionary bonuses, commissions or other incentives as long as they are paid quarterly and do not exceed 10% of the $47,476 salary level. The regulations also give employers the opportunity to provide a "make up" payment if, for example, poor sales in the quarter make for lower commissions and render the employee's quarterly salary below the new salary threshold. This presents perhaps the most complex compliance concern. Paying and accounting for bonuses and incentives on a quarterly basis represents a new way of operating for many employers who are used to performing this function on an annual basis. Managers will need to be mindful of whether production bonuses or other incentives are sufficient for employees to reach the salary threshold but also not large enough to surpass the 10% limit.
- Duties Test Remains the Same: Despite anticipated changes, in the final regulations, DOL adhered to the existing duties test and the critical question remains whether an employee's primary duty satisfies the administrative, professional, or executive definitions.
It is critical that you take the time to review the classification of employees to ensure compliance with the new rules. If current exempt employees do not meet the new salary threshold, you will need to either increase the employee’s salary to meet the threshold, or reclassify the employee as non-exempt and pay overtime for any hours worked in excess of 40 hours. It will be important for you to understand what hours are considered “hours worked” requiring compensation and be mindful of recordkeeping obligations for non-exempt employees. Tracking employee hours just became your biggest project. If you have employees working remotely or on flexible schedules, take particular note. Such workers don’t need to "punch the clock," but you will need to track their time in a way that proves they are not working more than 40 hours a week.
The reality is that these final rules will have a major financial and operational impact on all businesses. We can help you get on the path to compliance. That December deadline will be here before you know it. Do not delay in making preparations for it.