Exempt from OT? Maybe not… get to know the new rules
EDITOR’S NOTE: The following is taken from Diel & Forguson’s monthly newsletter.
Under the Fair Labor Standards Act, which originally introduced the concepts of a 40-hour work week, a minimum wage, and “time-and-a-half” overtime pay, the Department of Labor is changing the rules for overtime exemptions.
The new standards are outlined in the “Final Rule on Defining and Delimiting the Exemptions for Executive, Administrative and Professional Employees.” The Final Rule updates the salary and compensation levels needed to exempt certain workers from overtime pay. The new rules are effective Dec. 1, 2016.
In order for an employee to be exempt from overtime pay, he or she must meet three conditions. These are often called “white collar exemptions.”
– Salary basis test, meaning that a worker is paid on a salary basis rather than hourly.
– Salary level test, meaning the worker’s salary falls within a certain range.
– Duties test, meaning the job involves exempt duties, including certain professional fields and various management or executive responsibilities.
The only requirement affected by the Final Rule is the salary level test. Any employee earning more than $913 per week (or $47,476 per year) will be exempt from overtime pay, provided they also pass both the salary basis and duties tests. The amount is currently $455 per week (or $23,660 per year.) Up to 10 percent of this standard salary level can include nondiscretionary bonuses and incentive payments such as commissions.
Highly Compensated Employees, subject to a more minimal duties test, are also ineligible for overtime. The Final Rule raises their total annual compensation level from $100,000 to $134,004.
The other major change is that this wage threshold will be automatically adjusted every three years, beginning on Jan. 1, 2020. The new salary level is based on Census data compiled from the 40th percentile of earnings of full-time salaried workers. Rate adjustments will be calculated based on future Census data using the same formula.
Options for employers for responding to the Final Rule
Employers may want to evaluate their payroll data and the needs of their business to decide if they should make any changes with compliance to the Final Rule. The following are general options and are not intended to be specific suggestions.
1. Make no changes. An employer can choose to make no changes to his/her employees’ pay or hours. They will continue to pay current salaries but will now include overtime after 40 hours for all employees making less than $913 per week.
2. Raise salaries. An employer may choose to raise salaries above the $913 threshold for certain employees. If the employee meets the two other white collar exemption criteria, they would be exempt from overtime pay.
3. Reorganize workloads, adjust schedules or spread work hours. Distributing assignments to different employees may equalize the overtime necessary to complete projects.
4. Adjust wages. Changing a salaried worker to an hourly rate may prove more cost-effective.
Some exceptions to the Final Rule may occur for certain non-profit employers, as well as state and local governments.
Non-profits may not be covered by the Fair Labor Standards Act, but their employees may be entitled to FLSA protections. Factors such as annual sales data and interstate work may determine coverage.
State and local government employees may be covered by some Fair Labor Standards rules that are unique to public sector workers, such as the use of compensatory time (comp time) and the use of “work periods” instead of “workweeks.”
While the rules may differ slightly, the increased salary thresholds are the same as for all workers.
For more information, see http://www.dol.gov/whd/overtime/final2016/.
Diel & Forguson LLC is a CPA firm with offices in O’Fallon, Ill., and St. Louis.