RPBC – FLSA New OverTime Rules

RPBC – FLSA New OverTime Rules

New Overtime Rules and the White Collar Exemptions

The DOL has issued a final rule that, effective Dec. 1, 2016, makes changes to the overtime rules under the fair labor standards act.

The biggest change is the threshold for paying overtime on any white collar employee has increased from a minimum salary requirement of $455 per week to $913 per week. That means effective Dec 1, 2016 anyone earning less than $47,476 is generally required to receive overtime pay for time worked in excess of 40 hours.

All payroll is generally subject to overtime rules regardless of pay unless the position qualifies for one of the white-collar exemptions described below. For employees who do not qualify for one of the white collar exemptions the employee will be classified into one of two categories to determine how to calculate overtime: salary-nonexempt or hourly-nonexempt.

What businesses are covered by the fair labor standards act? This rule generally applies to any business with at least $500,000 gross revenue and employees engaged in interstate commerce which can be as simple as answering an out of state phone call or performing a web search.

The business owner who manages the business and owns at least 20% of the business is exempt from these rules but the regulation does not state whether the spouse is also exempt under the attribution rules. 29 CFR 541.101 This is very important for S corp owners who must pay themselves a fair salary.

The new salary exemption thresholds will be adjusted every 3 years.

Existing Rules Still on the Books that may become more important with the new rules:

  • Fluctuating Work Week: There has always been an available special method of calculating overtime called Fluctuating Work Week where you could pay a salary to an employee and that salary would be considered all compensation for hours worked except that in the weeks where the employee worked more than 40 hours, the employee was due an additional ½ time at the hourly rate for the hours worked that pay period. For example, an employee making $800 per week and working 50 hours in a particular work week would be considered to earn $16 per hour for the hours worked. The employer would owe an additional $8 per hour for the 10 hours of overtime in that particular week.
  • On Call Time: Often times an employee must stay on the premises or be available on call. The general interpretations have been if the employee is free to leave the premises and do personal jobs those hours are not considered hours worked for overtime purposes.

NEW WHITE-COLLAR EXEMPTIONS – EFFECTIVE DEC. 1, 2016

EXECUTIVE 29 CFR 541.100

1. Salary of at least $913 a week ($47,476 annual). (Quarterly nondiscretionary bonus or incentive can be 10% or $91 per week)
2. Work not directly and closely related to employee’s exempt executive duties cannot exceed 20% of own hours worked in workweek.

All conditions must be met:

1. Primary duty must be managing the enterprise, or a recognized department or subdivision of the enterprise; and

2. Must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and

3. The employee must have the authority to hire or fire other employees (or the employee’s suggestions as to the hiring, firing, promotion, or other change of status of other employees must be given particular weight).

ADMINISTRATIVE 29 CFR 541.200

1. Salary or fees of at least $913 a week. ($47,476 annual). (Quarterly nondiscretionary bonus or incentive can be 10% or $91 per week)

3. Work not directly and closely related to employee’s exempt administrative duties cannot exceed 20% of own hours worked in workweek.

All conditions must be met:

1. Primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and

2. Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

PROFESSIONAL 29 CFR 541.300

1. Salary or fees of at least $913 a week. ($47,476 annual). (Quarterly nondiscretionary bonus or incentive can be 10% or $91 per week)

2. Work not essential part of and necessarily incident to employee’s exempt professional duties cannot exceed 20% of own hours worked in workweek.

For the learned professional, all conditions must be met:
1. Primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; and

2. The advanced knowledge must be in a field of science or learning; and

3. The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction

For the creative professional, the following condition must be met:

1. Primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

Teachers are exempt and salary level test does not apply including kindergarten, nursery school, skilled and semi-skilled trades, automobile driving instruction, aircraft flight instruction, home economics, vocal or music teachers.

Employees practicing law or medicine including medical internship or residency programs are exempt and salary level test does not apply.

OUTSIDE SALESPERSON29 CFR 541.500

1. No salary requirement.

2. Work other than making outside sales or obtaining orders or contracts for services of facilities cannot exceed 20% of hours worked in workweek by nonexempt employees.

All conditions must be met:

1. Primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and

2. Must be customarily and regularly engaged away from the employer’s place or places of business.

COMPUTER PROFESSIONAL 29 CFR 541.400

1. Must be paid on a salary or fee basis of at least $913 per week; ($47,476 annual). (Quarterly nondiscretionary bonus or incentive can be 10% or $91 per week) or

2. Paid at an hourly rate of not less than $27.63 per hour.

Must be employed as a systems analyst, programmer, software engineer, or other similarly skilled worker in the computer field; and Primary duty must consist of:

1. the application of systems analysis techniques and procedures including consulting with users to determine hardware, software, or system functional specifications;

2. the design, development, documentation, analysis, creation, testing, or modification of computer systems or programs including prototypes based on and related to user or system design specifications;

3. the design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or

4. a combination of the aforementioned duties, the performance of which requires the same level of skills.

HIGHLY COMPENSATED EMPLOYEES 29 CFR 541.601

Must be compensated at least $134,004 on an annual basis which must include at least $913 per week.

Must perform office or non-manual work; and Must perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the standard tests for exemptions.

THREE MAJOR OPTIONS FOR COMPLIANCE

      1 Increase employees’ salaries to above $47,476 to keep them exempt from Overtime.
      2 Reclassify positions that pay between $23,660 and $47,476 from exempt to nonexempt, and pay employees in those positions overtime when they work more than 40 hours a week.
      3 Restructure the workforce or particular jobs. This might include removing some duties from a group of employees so that they can complete their work in 40 hours a week and transferring those duties to another group who have had their salaries increased to remain exempt.

Option 1 – Increase Salaries

Increase employees’ salaries to above $47,476 to keep them exempt from Overtime.

RISKS
  • – Could create salary compression and result in higher-than-expected costs as compensation must be realigned up the ladder with higher salaried employees.
  • – Impact on budget for small businesses and organizations
OPPORTUNITIES
  • – Could improve morale by giving additional compensation and retention of exempt-status employees.
  • – Saves employer time by eliminating need to track, record and report hours worked.

Option 2 – Reclassify Jobs

Reclassify positions that pay between $23,660 and $47,476 from exempt to nonexempt.

  • – Increases costs for employers (overtime pay for formerly-salaried employees).
  • – Could create liability for employers that fail to track, record, report and compensate for all hours worked.
  • – Could damage morale, carry less flexibility and offer fewer benefits. Employees may view this as a demotion.
OPPORTUNITIES
  • – Although DOL does not particularly favor this, could pay employees in this group as salaried Non-Exempt (i.e. salaried with OT over 40 hours).
  • – Could improve morale by giving additional time-and-a-half compensation.
  • – Establishes a 40-hour work week and may increase work / life balance.

Option 3 – Reclassify Jobs

Restructure the workforce or particular jobs.

RISKS
  • – Could prompt employee concerns about equity and fairness.
  • – Must conduct separate exemption test to ensure transferred duties do not push job from exempt to non-exempt.
  • – May required training for supervisors of newly non-exempt workers.
OPPORTUNITIES
  • – Creates opportunity to reclassify jobs and retool job descriptions and responsibilities to achieve greater organizational synergy and efficiency.
  • – Offers chance to be more creative and resourceful in how work gets done.

OTHER CONSIDERATIONS

Impact on Recruiting
  • – Could impact recruiting due to changes in the FLSA regulations coupled with ACA (Affordable Care Act) qualifiers.
  • – Moves to increase workplace flexibility and attract younger employees may be restricted or limited by the new regulations.
Administrative and Policy Impact
  • – Employers may need to review existing or create new policies to enforce compliance with the impact of the new Overtime rules.
  • – Need to have systems in place to track hours for non-exempt staff.
Employee Communication is the Critical Step
  • – Anticipate in advance that some employees may be offended by a change to non-exempt status and allow for full discussions.
  • – Present potential changes to employees as soon as possible to meet the December 2016 deadline.
  • – Communicate with affected employers and their supervisors to proactively explain any protocol or policy changes.
  • – Educate employees on the reasons for the change and the final determination of their FLSA status based on the new regulations.

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