The Department of Labor is in the process of making significant changes to two exemptions that could significantly impact your company: the white collar overtime exemption and the exemption for highly compensated employees. The final rule has not been published, but employers should consider making preparations now based on the proposed rule.
In summary, the salary threshold for two exemptions from overtime pay - the white collar exemption and the highly compensated employee exemption - are increasing, with the white collar exemption more than doubling the current level. This means that employers will need to increase salaries to retain the exemptions or pay overtime to employees who do not meet the new test. Here is a brief summary of the changes:
Change in White Collar Exemption
Under the Fair Labor Standards Act, employers are not required to pay overtime to exempt employees who work over 40 hours per workweek. To be exempt, an employee must:
1) Meet the job duties test for an executive, administrative, professional, or computer employee (which is not changing under the proposed legislation);
2) Be paid on a salary basis, which means generally that the employee receives his or her full salary regardless of the days or hours worked per week[1]; and
3) Be paid at least the salary threshold amount. The proposed rule increases the minimum salary level to $970 per week in 2016 or $50,440 per year, which is up from the current salary threshold of $455 per week or $23,660 annually. Also, the proposed rule is expected to have automatic yearly increases to the salary threshold.
Highly Compensated Employee Exemption
Another proposed change relates to the exemption for "highly-compensated" workers. To be exempt, a highly-compensated employee:
1) Must earn total annual compensation currently of $100,000.00 or more, which includes at least $455 per week paid on a salary basis, with proposed annual compensation increased to $122,148.00;
2) Must have a primary duty which includes performing office or non-manual work; and
3) Customarily and regularly perform at least one of the exempt duties of an exempt executive, administrative, or professional employee.
Timing
Exactly when the changes will go into effect is not known. The final rule was sent to the White House Office of Management and Budget (OMB) on March 14, 2016. The OMB will review the final rule and then publish it in the Federal Register. Congress then has a period to review before it becomes law. Some are speculating whether the government is trying to get the law implemented under the current presidential administration.
Next Steps for Businesses
Employers may want to start planning ahead now by:
- Auditing and evaluating jobs to determine proper classification of exempt or non-exempt status. For example, interview employees to determine their current job duties and then review job descriptions. How do they line up with the job duty requirements for the exemptions? Do job descriptions need to be updated? If the job duties qualify for an exemption, then evaluate the pay to see if the threshold is met.
- Reviewing salaries and financial impacts - The new law will cost employers more. Employers will need to pay overtime to previously exempt employees who make less than $970 per week or employers can choose to raise salaries of exempt employees to meet the new threshold which is proposed as not less than $970 per week.
- Reviewing handbook policies - Is there a policy on overtime that requires employees to obtain advance approval? Is there a work from home policy? What is the timekeeping policy? Non-exempt employees must keep track of all time worked (even outside of regular business hours).
- Conducting management training - For example, with potentially more employees that are not exempt and need to be paid for overtime, managers must be mindful of when an employee is working, such as during the employee's lunch or answering emails at home before or after work, which would count towards hours worked.
[1] Note that certain computer employees can be paid on an hourly basis and still qualify as exempt if they meet the hourly threshold.
ABOUT THE AUTHOR – SHANNON MIDDLETON
Shannon Middleton is an attorney at Gutwein Law. Prior to receiving her J.D. from Indiana University McKinney School of Law, she earned a BS in Management from Purdue University. She focuses primarily on business and employment law.
