Department of Labor overtime rules – FAQs
Posted On: 7-8-2016 | Posted By: Katie Barthel, CPA
As we shared with you in May, the Department of Labor issued new federal regulations that define which employees are protected by, and which employees are exempt from, the Fair Labor Standards Act’s overtime standards.
The rules more than doubled the minimum salary threshold for exempt employees, so employers will need to review employee classifications and payment practices to ensure they are in compliance when the changes take effect. To help you get in compliance, we’ve compiled these Frequently Asked Questions. We also encourage you to contact your WK advisor and your employment law firm if you have any concerns.
What are the new minimum salary thresholds?
The new Department of Labor (DOL) regulations raise the minimum salary for exempt employees to $913 per week ($47,476 per year), up from $455 per week ($23,660 per year). This new rule also increases the threshold for highly compensated employees to $134,004 per year, up from $100,000 per year.
When does this new ruling take effect?
This new rule is effective December 1, 2016. All changes must be implemented by the pay period that includes December 1st.
Why did the DOL update this rule?
The overtime rules currently in effect today have not been comprehensively updated since the 1970s. Currently, 4.2 million Americans work more than 40 hours per week but do not receive overtime pay. To address this, President Obama directed the DOL to update the regulations.
How was this threshold determined?
The DOL set the salary threshold at the 40th percentile of full-time salaried workers in the lowest-income census region, the South. Critics of this rule have noted that Washington, D.C. is included in this calculation, which has a much higher median salary than other parts of the South.
The threshold for highly compensated employees is calculated at the 90th percentile of full-time salaried workers nationally.
How will this affect me?
Most business owners will have to make one or more changes to comply with this new ruling. The following are examples of some changes you might have to make:
- changing the employment statuses of certain employees from exempt to non-exempt;
- purchasing time-keeping software and taking the time to implement it;
- developing or altering wage policies and time reporting procedures;
- instructing non-exempt employees on how to track their time;
- training staff on any company-required meal and rest breaks for non-exempt employees;
- explaining to employees why their pay method is changing; and
- establishing an approval process for any overtime pay.
I can’t afford to pay my exempt employees above the new threshold. What can I do?
If you do not have the extra money in the budget to raise your exempt employees’ salaries to or above the new minimum salary threshold, you must pay them overtime if they work more than 40 hours per week. One solution available to you is a cost-neutral one, whereby you back into an hourly rate based on the overtime your employees typically work each week. You will end up paying your employees the same in the long run. While this is an option to you, it might be difficult to implement for the following reasons:
- your expectations for how much overtime your employees work may drastically differ from reality;
- getting salaried employees to track time accurately enough for you to use in a calculation could be a challenge;
- overtime may not be worked equitably throughout the year, making your employees’ paychecks change from week to week;
- explaining to your employees why their hourly rate appears to be so low could be a difficult conversation; and,
- you must still pay your employees above minimum wage.
Another option is to allow your employees to flex their time within the workweek. Your employees can vary their arrival and departure times, but still may not work more than 40 hours per week without incurring overtime pay. Allowing employees to flex their schedule might help with evening and weekend coverage that you are now covering with exempt workers’ time. Be sure to check your state’s laws regarding overtime, however, to ensure you are in compliance. California, for example, requires overtime pay for time in excess of eight hours per day.
Are non-profits exempt from this rule?
No, non-profits are not going to be exempt from this rule. There are two types of coverage under the Fair Labor Standards Act (FLSA) that you must look at: “enterprise coverage” and “individual coverage”. Under enterprise coverage, the FLSA applies to businesses with annual sales of at least $500,000. This threshold is for any business, not just non-profits. For a non-profit, enterprise coverage only applies to the activities performed for a business purpose (such as operating a gift shop, or providing veterinary services for a fee); it does not apply to the organization’s charitable activities. So, it might be true that many non-profits are exempt from the FLSA when using enterprise coverage.
Despite the numerical threshold for an enterprise “business” purpose, certain activities conducted by either for profits or not for profits are deemed to be performed for a business purpose regardless. These include activities performed in connection with the operation of a hospital, an institution primarily engaged in the care of the sick, the aged, the mentally ill who reside on the premises of such institution, a school for mentally or physically handicapped or gifted children, an elementary or secondary school, or an institution of higher education.
The FLSA gives individual coverage to all employees who participate in interstate commerce. Interstate commerce includes more than you might think, such as using products that have been shipped interstate, making an interstate phone call, or using the internet to order products. Because most non-profit employees would qualify for individual coverage, the non-profit will need to comply with the new law.
What else do I need to know?
- The DOL will automatically update these minimum thresholds every three years beginning January 1, 2020.
- Bonuses and commissions can make up to 10% of the annualized salary requirement, but they must be paid at least quarterly. If they are not paid quarterly, a catch-up payment is required to keep your employees on an exempt status.
- Missouri requires 30 days’ notice for reduction in an employee’s pay, so salary decisions must be made well in advance of the December 1st effective date.
- Fluctuating workweeks might be an option that can save you money, but they could be costly to implement. Overtime pay for an employee on a fluctuating workweek is only calculated at half the hourly rate rather than 1 ½ the hourly rate.
- Employees must be compensated for all time worked, even if that time was unauthorized. So, if you have a policy that a non-exempt employee cannot work more than 40 hours per week without permission and the employee works overtime anyway, employers must pay overtime at the time-and-one-half rate. The employee can be disciplined for the unauthorized hours, but they must be paid.
Penalties for noncompliance with DOL regulations can be steep, so it’s important to understand the requirements of overtime pay. Contact your WK advisor at (573) 442-6171 or (573) 635-6196 if you’d like to discuss your specific circumstances.
Exempt Employees. Exempt employees are not covered by the FLSA’s overtime pay requirement. The employee must satisfy the following three tests to be considered exempt:
- Salary-level test (make more than $913 per week).
- Salary-basis test (receive their full salary in any week they perform work, regardless of the quality or quantity of work).
- Duties test (the employee’s primary duties must meet certain criteria). This test did not change with the new rule.
Non-Exempt Employees. Employees covered by the FLSA and therefore entitled to overtime pay. These workers can be paid with a salary or on an hourly basis.
Highly Compensated Employees. A highly compensated employee is deemed to be exempt if all of the following are true:
- The employee earns more than $134,004 per year, and gets paid at least $913 per week on a salary basis;
- The employee’s primary duty includes performing office or non-manual work; and,
- The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
Overtime Pay. Overtime is calculated at 1.5 times the hourly rate for every hour after the first 40 hours in one calendar week.
Fluctuating Workweeks. A fluctuating workweek is when an employee who is employed on a salary basis has hours of work which fluctuate from week to week. The salary he receives is paid to him at a fixed amount, regardless of the amount of hours he works that week compared to the previous week.