Department of Labor Changes
As you are likely aware, the Department of Labor has issued a mandate raising the minimum wage standard for exempt employees to be qualified for exemption from overtime pay. Even though the law is being touted as the “Overtime Rule” it doesn’t really impact how overtime is paid – rather it changes the minimum amount an employee must earn to meet the “salary test” to be eligible to be exempt from overtime pay. The effective date of this change is December 1, 2016 and is fast approaching. Are you ready?
WHAT YOU SHOULD KNOW
Currently, to be considered “exempt,” these employees must generally satisfy three tests:
- Salary-level test: Employers must pay employees at least the new minimum salary per week.
- Salary-basis test: With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work.
- Duties test: The employee’s primary duties must meet certain criteria.
The “Salary-Level” Test
Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a “salary basis.” If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.
The “Salary-Basis” Test
Starting December 1, 2016, to qualify for exemption, employees generally must be paid at not less than $913 per week or $47,476 per year on a salary basis. These salary requirements do not apply to outside sales employees, teachers, and employees practicing law or medicine.
For the first time, employers may use nondiscretionary bonuses (generally defined as those announced or promised in advance), incentive payments, and commissions, to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions, as long as these forms of compensation are paid at least quarterly. To satisfy the rule, employers may make one final catch-up payment no later than the next pay period after at the end of the quarter if the bonus, incentive payment, or commission ended up being less than anticipated and the employee’s weekly salary plus nondiscretionary bonuses, incentives and commissions does not equal or exceed 13 times the minimum weekly salary of $913.
The “Duties” Test
The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.
To qualify for exemption, employees generally must meet certain tests regarding their job duties. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department of Labor’s regulations.
To simplify, the exempt employee’s duties must fit into one of the following FLSA buckets:
To qualify for the executive employee exemption, all of the following tests must be met:
To qualify for the administrative employee exemption, all of the following tests must be met:
Computer Employee Exemption
To qualify for the computer employee exemption, the following tests must be met:
- The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; and
- The employee’s 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.
Outside Sales Exemption
To qualify for the outside sales employee exemption, all of the following tests must be met:
CLASSIFICATIONS – EXPLAINED
Hourly nonexempt employees are paid based on the number of hours (or time) they work. Such employees are eligible for overtime at a rate of at least one and one-half the base hourly rate. Hourly nonexempt employees are classified as such because of the type of duties performed, the usual level of decision-making authority (of a significant nature), and the method of compensation. Nonexempt employees are normally required to account for hours and fractional hours worked.
Employees classified as both salaried and exempt receive a weekly rate (instead of an hourly rate) that meets the minimum wage standard under the Fair Labor Standards Act (FLSA), plus they are exempt from the FLSA regulations on overtime pay based on their job duties and responsibilities. Employees who work in an administrative, executive or professional capacity generally are exempt from overtime rules because the work involves duties related to the company’s management. Some outside sales personnel and employees in computer-related occupations are exempt as well. The criteria for exempt classifications vary; however, a common thread in the exempt status criteria is that employees must use independent judgment in performing the majority of their job duties. Exempt workers do not receive overtime pay, yet the company expects them to work as many hours as it takes to fulfill their job duties, even if they have to work more than 40 hours during the workweek (smallbusiness.chron.com).
Salaried Non-Exempt Fluctuating Work Week (FWW)
Under the salaried nonexempt FWW method of payment an employee may be paid a fixed salary that serves as compensation for all hours worked if it is sufficient to compensate the employee for all straight time hours worked at a rate not less than the minimum wage and the employee is paid an additional one-half of the regular rate for all overtime hours instead of one and one half that is required under the hourly nonexempt classification (regular rate is calculated by taking the weekly rate and divide by the total number of hours worked).
The regular rate of pay will vary due to the fluctuating hours worked week to week. The full salary must be paid even when the full schedule of hours is not worked – no partial deductions from the base rate are permitted. Finally, there must be a clear mutual understanding of the parties that the fixed salary is compensation for however many hours the employee may work in a particular week, rather than for a fixed number of hours per week. A salaried nonexempt FWW employee is required to track hours worked including those hours in excess of 40-hours per week (www.DOL.gov).
WHAT ARE YOUR OPTIONS?
- Increase salaried exempt employees who fall below the threshold to an annual salary of at least $47,476; or
- Change status of salary exempt employees who fall below the threshold to hourly nonexempt, making them eligible for overtime premium (and restrict overtime if necessary); or
- For salaried exempt employees who are regularly scheduled to work, and do work, a fixed schedule of more than 40 hours per week, change status to hourly nonexempt and adjust base rate to accommodate for increased overtime premium pay; or
- Change salaried exempt employees who do not meet the threshold, but who do meet the criteria for FWW, to salaried nonexempt on a fluctuating workweek.
- A combination of the above.
* DOL Fact Sheet #17E – Exemption for Employees in Computer-Related Occupations under the Fair Labor Standards Act (FLSA), has not yet been updated to the new DOL rules. This hourly rate is the current rate for Computer Professionals who are paid on an hourly basis. There was no information identified that indicates that there will or will not be a change to the current hourly rate for Computer Professionals.
The information contained in this article is not intended to be legal advice and is provided based on opinion and interpretation. Please seek the advice of your labor attorney for legal advice.
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