New Overtime Rules Warrant A Close Look At Payroll Practices
Since 2004, the vast majority of salaried workers have been exempt from the overtime requirements outlined in the Fair Labor Standards Act, under a handful of so-called “white collar” exemptions. While these exemptions hinge in part on a job duties test, according to WageAdvocates.com, the amount of a worker’s salary is also crucial. Until recently, anyone making under $23,660 per year, regardless of their duties, was automatically entitled to overtime pay. Soon, that won’t be true.
Raising The Salary Thresholds For Overtime
On December 1, 2016, a big chunk of your workforce is probably going to switch from exempt to non-exempt. Per a new Labor Department rule, the salary threshold for exemption is set to rise, from its current level of $23,660 to $47,476, increasing the number of salaried workers who are entitled to overtime more than five-fold. After December 1, any salaried worker making less than $47,476 will be entitled to overtime pay, regardless of their duties.
Government estimates suggest that around 36% of salaried workers, somewhere close to 4.2 million people, will have a legal right to overtime after the rule takes effect. Today, only about 7% of salaried workers do.
The definition of a “highly compensated employee,” traditionally exempt from overtime requirements, has also received an update. Subject to a minimal duties test, highly compensated employees, or HCEs, used to make $100,000 per year. That level will now increase to $134,004.
Watch For New Changes Every Three Years
The changes, however, only begin with these initial increases in the salary threshold. In a move that may prove more impactful over the long-term, the Department of Labor has established a mechanism that will automatically update the salary threshold every three years.
For its main metric, the agency intends to use the standard salary made by the 40th percentile of full-time salaried workers in the country’s lowest-income Census region. Currently, that’s the Southern states. If that changes in the future, so too will the Labor Department’s metric, but the 40th percentile will remain the watermark.
The threshold for highly compensated employees, on the other hand, has been set at the 90th percentile of full-time salaried workers nationally. That number will certainly change, too, and in the future, it would behoove an astute HR manager to check back with the Department every three years.
Evaluate Your Options & Act Quickly
Some employers will choose to raise salaries, meeting the threshold for exemption and thus avoiding the new overtime requirements. Others could convert salaried employees to hourly employees, monitoring their hours closely to avoid excessive overtime. You could also keep newly-eligible employees salaried, but maintain strict 40-hour workweeks and take a hit in productivity. Or you could maintain current salaries, and just stay on top of hours worked.
It’s probably a good idea, no matter which combination of solutions you decide on, to start tracking the hours of exempt salaried employees who are at or below the new threshold now. That way you can begin thinking about altering your pay structure to remain in compliance. And don’t forget to talk to your employees now, preparing them for a possible change to non-exempt status.
Tim Becker Partner at Minneapolis’ Johnson // Becker PLLC, and lead sponsor of WageAdvocates.com. He is committed to providing clients effective, aggressive legal representation, and has prosecuted numerous individual FLSA violation claims.