Back in 2014, President Obama tasked the Secretary of Labor with updating the overtime regulations as they relate to overtime pay exemptions. The intent was to get the regulation details back in alignment with the original intent of the Fair Labor Standards Act (FLSA).
 |
As it now stands, the FLSA allows exemptions to overtime pay as long as specific requirements are met, namely the salary basis test and the duties test. (The duties required vary depending on what exemption is being utilized; the most common exemptions are the administrative, executive, and professional exemptions).
To meet the salary component of the overtime pay exemptions today, an employee must be paid on a salaried basis at a minimum rate of $455 per week. With the updated regulations that go into effect starting December 1, 2016, that amount will increase to $913 per week, which equates to $47,476 per year. According to the U.S. Department of Labor (DOL) website, this new level equates to the “40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South.”[i]
Additionally, this amount will now be automatically updated every 3 years.
These changes were announced in May 2016 to give employers time to prepare and implement changes in their workforce pay procedures before the December 1 deadline. For any employee who is now exempt but not being paid at or above the new required level, employers are faced with these options:
- Increasing pay to be at or above the new minimum, thus keeping the overtime exemption intact.
- Not increasing that employee’s base pay to the new level, thus losing the exemption, and then paying that employee overtime pay whenever he or she works more than 40 hours in a workweek (or sooner, depending on state regulations[ii]). Some employers are opting to limit employee hours—such as stopping work at 40 hours—to reduce total extra pay owed in this scenario.
Given that this December deadline is fast approaching, now is a perfect time to conduct an exemption audit. This can be the first step in ensuring that all employees are properly classified. After ensuring all employees are properly classified, the employer can create a plan to be in compliance with the regulation changes that take effect on December 1, 2016.
Conducting an Exemption Audit
To conduct an exemption audit, the first step is to gather a list of which jobs must be audited. There may be some roles—highly-paid executives, for example—that clearly meet all exemption requirements both before and after the regulation changes, and do not need to be audited. Another example that would not need auditing is anyone who is not currently exempt (those who are paid overtime) and has a role that definitely does not qualify for an exemption.
Here’s what to look for:
- For all exempt employees, ensure that the job description is updated and accurately reflects current job requirements. Pay special attention to any job in which the job requirements may have changed since the individual was hired. This is an intensive task that typically relies on in-person interviews with the employee and his or her supervisor to get a realistic view of the job duties, irrespective of what the job description may have said. Remember that job title is not an exemption qualifier in and of itself; the job duties must meet the legal requirements for the exemption to be valid.
- Once the first step is done, confirm that those (real, updated, accurate) job requirements meet the duties test for the exemption in question. If you find jobs that no longer meet the exemption requirements after the job descriptions have been updated and assessed, start the process of changing that individual’s status to nonexempt, and pay that employee overtime pay when required[iii]. Consider paying back overtime owed to these employees to avoid legal penalties later.
- Ensure all exempt employees are paid on a salaried basis, and no improper deductions from that salary are being taken. Consider instituting a payroll auditing system to confirm that this remains the case. Remember that salary level alone is not enough to qualify for the exemption—even if someone is paid more than the new regulations dictate, he or she must still meet the duties test.
- Consider instituting a regular exemption audit schedule to avoid the risk of having misclassifications in the future.
- Confirm that there are no accidental misclassifications, such as individuals who have “manager” in their title but do not perform duties required for the exemption.
For all remaining exempt employees, assess which ones do not meet the new salary requirements. This will be your starting point to assess next steps to get in compliance before December 1, 2016.
*This article does not constitute legal advice. Always consult legal counsel with specific questions.
[i] https://www.dol.gov/whd/overtime/final2016/
[ii] Some states have stricter overtime regulations than the federal regulations. Be sure to check your state and local laws.
[iii] Note: The process of changing an employee’s exemption status should not be taken lightly; it can raise red flags to simply start paying someone overtime without explanation, and the employer may be liable for back overtime pay for the period the employee should have been eligible to receive it (up to the statute of limitations). Do further research into the best ways to manage this change while minimizing risk if you’re not already familiar with this type of process.