The Salary Threshold for Exempt Status Becomes Effective December 1. Are You Prepared

We previously told you how the U.S. Department of Labor (DOL) was in the process of amending the overtime exemption rules under the Fair Labor Standards Act (FLSA). Recently, the DOL released the final rule updating the overtime exemption rules under the FLSA. The Final Rule will be effective on December 1, 2016.

Currently, the FLSA provides an exemption from overtime pay for employees who meet certain tests regarding their job duties and who are paid on a salary basis at no less than $455 per week.

Under the new regulations, the salary threshold for exempt status will increase from $23,600 per year ($455 per week) to $47,476 per year ($913 per week) – an amount in the 40th percentile of earnings for full-time salaried workers in the lowest wage census region (currently the South), according to the Bureau of Labor Statistics (BLS).

To qualify for the highly compensated employee (HCE) exemption, the final rule increases the salary threshold from the current level of $100,000 to $134,004. This amount corresponds to the 90^th percentile of full-time salaried workers nationally. According to the DOL the final rule for overtime exemptions makes 4.2 million employees eligible for overtime pay by the end of 2016. 

In addition to the increases in the salary thresholds, the final rule also provides a mechanism to automatically adjust the salary thresholds every three years, beginning on January 1, 2020. This will be done to ensure that  salary levels stay consistent with the above-mentioned percentiles in the future.   

Also, for the first time ever, the DOL will allow employers to count nondiscretionary bonus and incentive payments (including commissions) to satisfy up to 10% of the salary threshold level. These payments will have to be made on at least a quarterly basis. One catch-up payment will be allowed to be made at the end of each quarter to bring an employee up to the required level.  

Lastly, no changes were made to the duties test portion of the exemptions.

Frequently Asked Questions
With all of these changes going in to effect by the end of 2016, small and midsize businesses (SMBs) have come to TriNet asking for guidance regarding the effects these changes will have on their businesses. Some the most frequent questions from these employers are:

Q: How are employees who are classified as outside sales employees affected by this change?
A: The outside sales exemption will not be affected by the increase in the salary thresholds. In order to be classified under this exemption, employees only need to meet the duties test for the exemption. The outside sales exemption does not have a salary basis test or salary threshold test.

Q: If currently exempt salaried employees are reclassified as non-exempt, do they also now have to be paid on an hourly basis?
A: No, non-exempt employees can be paid on a salary or hourly basis. Newly classified non-exempt employees would now be eligible for overtime pay for an excess of 40 hours worked in a single work week. This is regardless of whether they are paid on an hourly or salary basis. This also applies in states where employees are potentially due overtime based on the number of hours that they work in a day (i.e. California).

Q: How do the nondiscretionary bonus and incentive payment options apply to the new salary threshold?
A: For the first time ever, employers will be able to apply nondiscretionary bonus and incentive payments to the salary threshold test for an employee’s exemption. In order for these payments to be applied, they will have to be made on at least a quarterly basis, meaning that annual bonuses would not qualify.

Q: If employees are being reclassified as non-exempt, are they now required to punch in and out in order to keep track of their hours?
A: The FLSA does not mandate that employers keep track of employees’ hours. However, employers do need to accurately track employee hours worked to ensure that they are properly calculating overtime and to also satisfy the FLSA’s record-keeping requirements for payroll records.

How can an SMB prepare for the increases in salary thresholds for exempt status?
A: We recommend businesses take the following steps:

1. Audit your exempt employees vs. your non-exempt employees and see if any exempt employees currently fall under the anticipated $47,476 annual salary threshold.

2. Once you identify current exempt employees who are earning less than $47,476, determine whether to increase their salary to $47,476 or change their status to non-exempt, making them eligible for overtime.  

3. Implement a cloud-based time and attendance system to track your employees’ hours. This will help you stay compliant with non-exempt employee hours.   

4. Evaluate exempt classifications and job descriptions to make sure the duties that your exempt employees perform qualify for exempt status.

5. If you haven’t already done so, partner with a company that provides a human capital management platform that includes HR guidance, employment law compliance and risk mitigation as well as payroll, time and attendance, and benefits management.  A single HR services vendor that can give you the technology and resources across all of these functions will help you be better prepared for upcoming compliance requirements.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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