Department of Labor Implements Significant Changes to Exemptions for Overtime

The United States Department of Labor, which is responsible in part for administering and enforcing minimum wage and overtime regulations, has implemented a change to the salary test for certain employees.  Come December 1, 2016, employees who are salaried and fall within the professional, administrative and executive class of exemptions from overtime now must be paid at least $913.00 a week salary.  This is an increase of $458.00 from the previous minimum of $455.00 a week.  On a yearly basis, this raises the salary to $47,476.00 annually.  The basis for the increase is the Department of Labor decided that employees within these classes of exemptions should be paid 35% of average weekly earnings.

Obviously, this has the potential to have a significant impact on many businesses.  In short, you may have to double the salary of employees who were considered exempt from overtime.  Now, you are not required to double your exempt employee’s salary, only increase their weekly pay so that it equals $913.00 a week.  So, if the employee is making $850.00 a week, you only need raise it to $913.00.

Employers are not required to convert employees from salary to hourly.  An employer may still consider an employee salaried and pay them less than the $913.00 a week, they must just keep track of their hours and if they work more than 40 hours a week, pay them 1.5 times their effective hourly rate, i.e. overtime.  For instance, if an employee is salaried at $40,000.00 a year, this works our to an effective hourly rate of $19.23 an hour.  If that employee works 10 hours of overtime, then in addition to their pay check of $769.23, the employer must pay the employee $192.30 in overtime.

If that change were not enough, the exemption for highly compensated employees rises from $100,000 minimum salary to $134,000.00 minimum salary.

Lastly, you can expect future increases to the minimum.  The DOL is slated to increase the salary levels every three years going forward.  It is predicted that the minimum salary level for exempt employees will rise to $51,000.00 in 2020.

Here are some strategies to consider:

  1. For employees close to the new threshold, it might make sense to bump them up to the threshold to maintain their exempt status from overtime.  This allows them to continue to work more than forty hours a week and not worry about incurring overtime
  2. For employees that are not close to the new threshold, you will need to implement a strict policy disallowing overtime, implement a time keeping device (time clock) and also require that they clock in and out.

Another option is to reduce employee’s hourly base rate so that their overtime hours do not exceed what their current salary is.  For instance, for the employee who is currently making $40,000.00 a year which equates to $19.23 an hour and works 50 hours a week, you could reduce their base rate from $19.23 an hour to $14.00 an hour.  This equals $560.00 a week at 40 hours.  10 hours of overtime at 21.00 ($14.00×1.5) an hour equals $210.00.  $560 plus $210 equals $770.00, virtually the same as weekly pay as salary at $40,000.00 a year.  Granted, this option will not help employee morale and does not address the situation where an employee’s weekly overtime hours vary.  Meaning, if more than 10 hours of overtime is worked, then the employee will be paid more than the $770.00 a week in this example.

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