It’s Almost Time: DOL Overtime Exemption Rules Effective Dec. 1, 2016

Changes are coming soon to overtime exemption rules. Issued in May 2016 by the United States Department of Labor (DOL), the updated final overtime rule (Final Rule) will be effective December 1, 2016.

Under the Fair Labor Standards Act, unless considered “Exempt,” an employee must be paid overtime pay of time and one half of regular hourly rate (150%) for all hours worked over 40 in a seven-day regular workweek. Currently, in order to be exempt, the employee must meet all parts of a three-part test:

1. Salary level test (currently $455 per week or $23,660 per year),
2. Salary Basis test (employees must be paid a pre-determined salary that is not subject to reductions based upon quality/quantity of work), and
3. Duties Test for White Collar Employees. Employees engaged in bona fide executive, administrative, or professional capacities that meet a prescribed “duties test” (including any employee employed in the capacity of academic administrative, or teacher in elementary or secondary schools or in the capacity of an outside sales employee, computer systems analyst, computer programmer, software engineer and other similarly skilled computer engineer (“White Collar Exemptions”).

The Final Rule changes effective in December 2016 are only directed to the Salary Level Test; the remaining two parts remain the same. Those changes are as follows:

1. The Salary Level Test of the Exempt Test is raised to $47,476.00 ($913 per week) from $23,660. The Salary Level has been updated seven times since 1938, the most recent one being in 2004. The Final Rules sets forth the salary threshold at the 40% percentile of full time salaries in the lowest wage Census Region which currently is the South.

2. In order for the pay requirement for the highly-compensated employee exemption to apply, the annual amount will be raised to $133,148 from $100,000. Employees must pay the standard weekly salary of $913 per week and the remaining amount of the Salary Level requirement or $85,672.00 may be made up by commissions, nondiscretionary bonuses, incentive pay and other forms of nondiscretionary deferred compensation.

3. The Final Rule established a mechanism which will cause the standard salary and compensation levels to be updated every three years starting on January 1, 2020 and based on changes in the CPI-U.  The DOL estimates that in 2020 the Salary Level will rise to $51,000. The same formula in No. 1 above will be used here.

4. Employers may use nondiscretionary bonuses and incentive payments (including commissions payments based on a fixed formula) to satisfy up to ten percent (10%) of the new Salary Level of $47,476.00; such payments must be paid quarterly or on a more frequent basis.   Bonuses would include payments for meeting production goals, retention bonuses, and other nondiscretionary formula payments tied to productivity and profitability.

Employers generally have three options:

1. Raise salaries to meet the new salary level;
2. Attempt to use nondiscretionary bonuses and incentive payments to meet the Salary Level threshold assuming the salary is only approximately $4700 short; or
3. Reclassify employees as non-exempt.

Employers should proceed in the following manner:

1. Review positions that are exempt from overtime and that are paid below $47,476 in annual salary and those that are below $42,728.40 in annual salary with at least $4,747 in bonuses and commissions (see Change #4 above). Additionally, review the three part test above and make sure that the job duties meet the White Collar Exemptions identified above and the Salary Basis Test.
2. Acquaint yourself with the conditions of the fluctuating work week method (“FWW Method”) to determine if this unique model may help you. The method allows the employer to pay non-exempt employees only half-time (50 percent) the regular rate for hours worked over 40 in a workweek if certain conditions are met. Those conditions can be found in 29 C.F.R. Section 778.114.
3. Gather data on how many hours employees work and have your employees/managers keep logs. Look at network access records and keyboard swipes for independent verification. It is possible that some jobs can be reconfigured so duplicative tasks are avoided or some tasks can be transferred to employees properly classified as exempt.
4. Create a new compensation plan for those workers who will be reclassified as exempt. Consider utilizing Change 4 above to create a cost-neutral solution whereby nondiscretionary bonuses and/or commissions would offset the need to raise salary.
5. Consider reverse engineering so pay stays the same. If employees are to be classified as hourly, employers could reverse engineer their rate of pay so that when the employee is paid overtime, the weekly rate stays the same. This could create morale problems if the employee never worked overtime but still received guaranteed weekly exempt pay and now has to work overtime to achieve the same weekly amount.
6. Create a training program to teach managers/employees the DOL wage and hour rules. Prevent overtime hours by training on meal and rest breaks, travel time, suffer or permit to work issues, use of electronic devices off company premises (including smartphone, computer and cell phone), etc. Carefully instruct non-exempt employees that they must keep track of all of their time, including their non-work time such as leaving in the middle of the day for personal business.
7. Start timekeeping processes. Create time cards, utilize clocks, and/or install various timekeeper software applications.
8. Communicate any wage and duty changes carefully to senior management, manager of reclassified employees and employees themselves. Work off explanation scripts so a consistent message is given that the company is making the changes due to legal changes and not anything to do with what the employees did personally.

Starting now – and not waiting until right before the changes take place in December – will allow you to strategically and systematically manage this huge change in compensation. There is no one best way to meet the new Salary Level obligations so starting now is extremely critical.

Posted by Attorney Ruth A. Binger. Binger serves both emerging and mature businesses concentrating in corporate law, intellectual property and technology law, digital media law, and labor and employment law. Her commitment to the success of small to medium-sized businesses, and her understanding of multi-faceted issues inherent in operations, are what distinguish Binger’s practice. http://www.dannamckitrick.com/people/binger.php