Preparing for Upcoming FLSA Changes: Will Your “Exempt” Employees Still Qualify?

On Wednesday, May 18, 2016, the U.S. Department of Labor published a new rule that will increase the salary requirements for “exempt” employees under the Fair Labor Standards Act. The regulation will go into effect on December 1, 2016, giving employers fewer than 200 days to prepare. What does this mean for you as an employer and what must you do now to be ready for the upcoming change?

Under the Fair Labor Standards Act (FLSA), non-exempt employees must be paid 1.5 times their regular pay rate for any time worked over 40 in a workweek. However, certain employees may be categorized as “exempt” from the FLSA’s overtime requirement. The exemption depends on three things:

  • The employee (for most purposes) must be paid a salary – a fixed, guaranteed minimum amount for any workweek regardless of hours worked;
  • The salary must meet a minimum threshold in order for the employee to qualify; and
  • The employee must perform exempt duties as determined by the job duties test.

The new regulation affects the second factor – the salary threshold. Currently, an employee must be paid at least $455 per week or $23,600 per year to satisfy the salary requirement. The new regulation more than doubles the required salary threshold to $913 per week or $47,476 per year for non-Highly Compensated Employees. The salary requirement for Highly Compensated Employees will increase from $100,000 to $134,004 per year. The Department of Labor will update the salary threshold every three years moving forward. The next adjustment after the new rule takes effect will be on January 1, 2020.

The new rule now allows employers to meet the salary threshold for non-Highly Compensated Employees through the payment of non-discretionary bonuses, incentive pay, or commissions. However, these payments must be made at least quarterly. If an employee does not earn enough of a non-discretionary bonus, incentive pay, or commissions in a quarter to meet the required salary level, employers may make a catch up payment no later than the next pay period after the end of the quarter. The catch up payment must be counted toward the prior quarter’s salary.

There are some things you should do now to ensure your company is FLSA compliant when the new rules take effect:

  • Identify employees who will need to be reclassified as of December 1, 2016 due to the new salary threshold, i.e., any employees who are currently exempt but paid less than $913 per week or $47,476 annually.
  • Identify employees who are currently exempt and barely meet the threshold, i.e., any employees who make just over $913 per week, realizing that in three years they may likely fall below the new threshold.
  • Track the number of hours these employees work and analyze the financial impact on your organization as you decide whether to:
    • Raise the employee’s pay to the new threshold level;
    • Reclassify the employee as non-exempt and pay overtime; or
    • Lower the employee’s pay to offset overtime requirements.
  • Consider how you will handle potential employee issues when you raise some employees over the new threshold while leaving those who are over the threshold at their current salary. For example, Employee A may currently make $850 per week; Employee B may currently make $950 per week. Employee B may make more money based on tenure, experience, skills, etc. If you raise Employee A to $913 per week, how will this affect Employee B?
  • Develop administrative plans to ensure your organization complies with the new rules keeping in mind that the salary threshold will be raised every three years.

If this feels overwhelming and you do not know where to begin, or if you have questions as you proceed with your preparation, we’d appreciate the opportunity to help. Remember, non-compliance can be very costly for your organization if you are subject to a DOL audit. Preparing now will make the transition easier for your organization when the rule goes into effect on December 1, 2016.

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