As published in the October 26, 2016 edition of the Sioux Falls Business Journal, Argus Leader.
Does your business have a plan for the December 1 onset of the new overtime rule? Don’t count on the recent litigation filed by a number of states or the bill passed last month by the U.S. House of Representatives to provide a reprieve from the new salary requirements. The new rule is estimated to impact 4.2 million workers across the country.
Generally, the Fair Labor Standards Act (FLSA) states that employees qualify for a White Collar Exemption from overtime requirements if three tests are satisfied: (1) the Salary Basis Test, (2) the Salary Level Test, and (3) the Duties Test. The new regulations update the Salary Level test needed to qualify as an exempt employee.
Currently, the Salary Level Test requires that most exempt employees be paid an amount of at least $455 per week, which is exclusive of board, lodging, or other expenses. The new rule more than doubles that amount to $913 per week. The annual salary requirement will increase from $23,660 to $47,476. In addition, the minimum salary requirement will subsequently increase every three years.
One additional tool provided to employers under the new rule is the ability to utilize nondiscretionary bonuses, incentive payments, and commission payments to satisfy up to 10% of the required salary level. If an employer establishes a policy that utilizes these incentives, the compensation attributable to these features must be paid out at least quarterly.
What Employers Can Do
Employers need to immediately develop a strategy to comply with these new requirements. Employers have several options to comply. For example, if the employee otherwise meets the requirements for exempt status, the employer could raise the employee’s salary to comply. Alternatively, the employer could move the employee to non-exempt status and convert the employee’s salary to an hourly pay equivalent to the employee’s current salary. The employer could require the employee not to exceed forty hours per week, and then no overtime is due. Under those circumstances, while an employer would have to pay the employee for any overtime worked, the employee could be subject to discipline for violating a company policy. If the employer desires to continue to pay the employee on a salary basis, the employee will still need to record hours worked and if the employee works over 40 hours during the work week, the employer will need to calculate the base hourly rate and pay the employee overtime at time and one half the base rate.
Employers should carefully consider their unique work environment and culture before adopting a specific policy with the help of an employment lawyer. Transitioning an employee from exempt to non-exempt is frequently more difficult for the employee than the employer, so carefully consider your communication plan and implementation strategy.
While the new salary requirements are clearly significant and will draw attention to many areas of FLSA compliance, employers do have options and should be proactive to control their risk.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.