By now, you’ve probably heard about the changes to the overtime exemption regulations proposed by the Department of Labor (DOL). Perhaps you’re concerned about what the changes might mean for you and your business, or what you can do now to prepare.
Fortunately, I’m here to help.
The Back Story
To start, let’s look at how the overtime exemptions work now.
Some people mistakenly believe that all salaried workers are exempt from overtime. Every year, this misconception costs many companies a lot of money in penalties and back wages. In fact, a job must meet very specific criteria for an employee to be considered “exempt.” Otherwise, even if an employee is “salaried,” they must receive overtime pay if they work more than 40 hours in a week.
In fact, there are a number of different exemption categories — for instance, commissioned sales people, some computer professionals and certain farm workers — but the current discussion centers around the exemptions for so-called “white-collar” jobs. These are the “executive, administrative, and professional” exemptions. For workers who fall into one of these categories:
- First, under the current rules, you must pay the employee a salary of at least $455 a week (or $23,660 a year).
- Once the employee has met the salary threshold, the employer must apply a “duties test” to determine if the employee’s job duties qualify the position to be considered exempt.
- If an employee makes over $100,000 a year, that worker is considered “highly compensated” and can be automatically considered exempt regardless of their job duties.
The Proposed Changes
The DOL set the current threshold wages back in 2004. They haven’t been updated since. According to the DOL, only 8% of full-time salaried employees fall below the $455 a week threshold today. In fact, a salary of $23,660 per year is now below the poverty line for a family of four.
As a result, the DOL believes that it’s time to make an adjustment.
The agency plans to raise the lower threshold so it covers 40% of full-time salaried employees. Most estimates say the cutoff likely will be around $970 a week ($50,440 a year) by 2016 (when the new rules are expected to take effect).
They’re also planning to raise the upper threshold (for “highly compensated workers”) to the 90th percentile of earnings for full-time salaried workers. The new amount would be about $122,148 a year.
The DOL is planning to “index” these thresholds so they’re automatically updated going forward. This would eliminate the problem of the thresholds becoming outdated and the necessity for large adjustments. They’re considering two approaches:
- Maintaining the thresholds so they continue to represent the 40th and 90th percentiles of weekly earning for full time salaried workers, or
- Annual updates based on the Consumer Price Index to match the changes with the inflation rate.
The DOL has also asked for comments on the duties tests, although the agency didn’t detail any specific proposed changes. Instead, they’re simply asking people to comment on whether the existing duties tests are “working as intended” to properly identify bona fide white collar workers.
The comment period for all these proposed changes ends on September 4, 2015.
What does this mean for you?
First, there’s no need to panic. You still have time to plan and make adjustments before the new rules will go into effect. Here’s a three-step plan to prepare for the changes and minimize their impact on your business.
First, evaluate your current employee compensation against the proposed changes.
If all your exempt employees already make more than $50,440 a year (or will by 2016), you don’t have to make any changes. Likewise, for employees who are already overtime-eligible now, nothing will change.
If an exempt employee’s salary is close to the cutoff and you’d like to maintain their exempt status, you’ll need to raise their pay by 2016 to meet or exceed the new threshold. This might be a good time to review the “duties test” for their position as well.
Otherwise, any salaried workers who continue to make less than $50,440 a year, or $970 a week, likely will become eligible for overtime regardless of their job duties. This could lead to one of the “silver linings” of this change. Today, many employers who face penalties and back wages for employee misclassification got tripped up on the duties test. When employees don’t pass the compensation threshold in the first place, the duties test never comes into play. This change could translate into fewer class action lawsuits and labor audits for companies accused of misclassifying workers.
Second, consider your options.
There are a number of things you can to do comply with the new rules, while still limiting the impact on your labor costs.
You may be tempted simply to convert all your lower-paid salaried exempt workers to hourly, because their compensation no longer meets the threshold and increasing their pay to $970 a week is not an option. This would probably be the simplest and most straightforward solution. But it could cause some morale problems and retention issues with workers who consider a salaried position to be more “prestigious” than an hourly job.
Fortunately, you don’t necessarily have to convert anyone from salaried to hourly.
Under the terms of the Fair Labor Standards Act (FLSA), you can pay non-exempt workers however you want (hourly, salaried, piecework, commission, etc.). You just need to be able to show they made at least the equivalent of the minimum wage for each hour they worked, and you have to pay them overtime when they work more than 40 hours in a week. (Your state may have more stringent rules. It’s a good idea to check with your employment law attorney to make sure.)
So you can keep them as “salaried” workers, as long as you track their time and pay them appropriately for any overtime they work.
To reduce your overtime costs, you can limit the hours your overtime-eligible employees work. Make sure they’re scheduled for no more than 40 hours per week. Prohibit any “after hours” work without the specific permission of their supervisor. If they don’t work any overtime, you don’t have to pay any overtime.
(Of course, if an overtime-eligible employee does work overtime — even if they didn’t have permission — you must pay them for it. The law allows you to discipline them for not getting approval, but you can’t refuse to pay the overtime.)
If your workload is such that you can’t reduce employees’ hours to avoid incurring overtime, you could consider reducing their compensation to account for the overtime they’ll be receiving. A caveat: while this would enable you to keep your labor costs fairly constant, it could cause some employee relations problems. Not many employees like to see their “official” wages cut, even if overtime causes the final checks to work out to about the same amount as before.
Alternatively, you could consider hiring part-time workers to handle the extra workload. If they work less than 40 hours a week, they would not be due any overtime pay. And if they keep your regular employees from incurring overtime as well, this could be a cost-effective solution.
Speaking of part-time workers, you should be able to continue to pay salaried part-time workers on staff now as you always have. As long as they continue to work fewer than 40 hours in a week, overtime will not apply, regardless of their status as exempt or non-exempt.
Important note: in some states, most notably California, overtime is calculated on a daily basis. If you operate in one of those states, make sure in addition to working fewer than 40 hours a week, your non-exempt employees also work fewer than eight hours in any given day, or you could still be liable for overtime pay.
If you have salaried employees making less than $970 a week whose work schedules change from week to week, you may be able to use a special overtime calculation rule. A “Fluctuating Work Week” arrangement allows you to maintain a non-exempt employees’ “salaried” status while saving some money on overtime. This option only applies for employees who aren’t scheduled for a standard recurring number of hours per week. Additionally, it’s not available everywhere. Some states have passed laws prohibiting it. If you’re interested in pursuing this option, check with your employment law attorney to see how it works, whether you qualify, whether it’s legal in your state, and what you need to do to implement it.
Start preparing now.
Don’t wait until the last minute to make changes. When everything gets done in a mad scramble under a looming deadline, important details get overlooked. When it comes to wage and hour law, those overlooked details can cost you and your company big bucks. You’ve got time to prepare — make good use of it!
It’s a good idea to start planning now what scheduling or staffing adjustments you might need to make to avoid incurring unintended or unnecessary overtime.
To that end, if you don’t already have a time and attendance tracking system in place, it’s a good time to get one. If you have one, but only some of your employees use it, start having everyone clock in and out. You can’t properly assess the impact of the new overtime rules, or plan what adjustments you might need to make, if you don’t have any idea how much overtime all your employees are working.
Some people don’t track hours for their exempt employees because they think it’s not allowed. They fear the DOL will reclassify the employees as overtime-eligible just because the company tracks their time. In fact, you can track exempt employee time without jeopardizing their exempt status. Recording, reporting and analyzing the work hours of exempt employees is fine. You just can’t pay them based on their time at work.
It’s especially important to track time for any exempt workers you have now who likely will become overtime eligible under the new rules. This will give you an idea of the overtime they’re incurring now, which will help you to plan what to do when the new rules take effect.
As it happens, there are some other very good reasons to track exempt employees’ work time. The best part is, the sooner you get started, the sooner you’ll start realizing those benefits of time tracking, without waiting for the DOL to update any rules.
While the DOL estimates the proposed changes to overtime regulations could make up to five million more workers eligible for overtime, there’s no need to panic. Simply:
- Evaluate your current employee compensation.
- Consider your options.
- Start preparing now.
And start tracking employee work time! Whether you’re starting from scratch, or you want to upgrade your current system, visit our web store or contact us. We’ve offer one of the widest selections of time-tracking solutions in the industry, so we can almost certainly help you find an Acroprint product ideal for your work environment. From the rugged and dependable Model 125, to our cloud-based AcroTime workforce management suite, we’ve got you covered.