Time is running out. With hope of a short-term legislative fix gone, many employers are facing the reality that they must increase salaries to $47,476 by Dec. 1 or pay overtime to some employees in order to comply with the U.S. Department of Labor’s (DOL) new regulation. Known as the “overtime rule,” the new regulation aims to curb what the DOL refers to as “the evil of overtime” by increasing the minimum threshold salary level required to classify a worker as exempt from overtime under the Executive, Administrative, and Professional (EAP) exemptions (a.k.a. White Collar Exemptions) found in the Fair Labor Standards Act (FLSA). (Editor’s note: For an overview and Jean’s take on the DOL’s new overtime rule, visit bit.ly/2as9TWi)
Under pressure to minimize costs related to increasing salaries, the DOL believes employers will reclassify employees in lower-paid salary exempt positions to nonexempt and, to avoid paying overtime, reduce their work hours. The DOL is targeting first-line supervisors and managers in several industries and occupations, including, among others, the “green” industry with landscaping, lawn service and groundskeeping workers.
Implement a DOL compliance plan
If you have employees in positions that are classified as salaried exempt under an EAP overtime exemption, now is the time to implement a DOL compliance plan to assess your risk, determine if your labor costs will increase and plan necessary changes. Your plan should include the following steps:
1. Identify employees currently paid guaranteed salaries regardless of the hours worked. These employees hold positions that are classified as “salaried exempt,” whether or not you have formally designated them as such. Create a list with the names, dates of hire, positions, locations, and rates of pay for these employees.
2. Eliminate from the list any employees who customarily and regularly work outside of the office, which could be your office or their home, performing the primary duty of making sales or obtaining orders or contracts for services. Regardless of how they are paid, these employees fall under the Outside Sales exemption and are not affected by the DOL overtime rule. Likewise, if you currently pay salaries to employees who qualify for the Agricultural Exemption from overtime, they are not affected by the overtime rule and can be eliminated from the list.
3. Ensure that all employees remaining on the salaried exempt list qualify for the “duties tests” associated with the applicable EAP exemption. Employees who do not meet the duties tests under one of the EAP exemptions do not qualify for an overtime exemption and, therefore, regardless of their salary rate, should be reclassified as nonexempt. (See pay plan options below.)
4. Identify employees on the salaried exempt list who meet the duties tests but who are not paid a guaranteed salary of at least $47,476 annualized ($913 per week). For these employees, by Dec. 1, either increase the guaranteed salary level to the minimum required amount or reclassify the position to nonexempt. For this group, also:
a. Consider the possibility of satisfying up to 10 percent of the guaranteed salary with a nondiscretionary bonus or incentive. Employers are permitted to pay a lower guaranteed salary (at least $42,728 annualized or $822 per week) that is supplemented by nondiscretionary bonuses or incentives, as long as the bonus or incentive is paid at least quarterly and the employee earns enough from the bonus to bring earnings up to the minimum required salary amount of $47,476.
b. Determine the anticipated cost to increase salaries (with or without the bonus option) versus transitioning employees to nonexempt pay plans. Consider the amount of overtime typically worked, how (or if) a bonus plan must change, adjustments that can be made to work schedules and job duties, and the impact on eligibility for benefits (those that are based on the method of pay or exempt/nonexempt classification).
5. Determine the best strategy for communicating changes to employees. When applicable, inform employees that the change is necessary to comply with new federal regulations affecting the payment of salaries and overtime. In most cases, it will not be necessary to circulate a written memo. However, if you elect to do so, ensure it is written or reviewed by a qualified professional. Expect your employees to be informed about the requirements and be prepared to answer questions they may have.
Transition to a nonexempt pay plan
There are many options for transitioning a salaried exempt pay plan to a nonexempt pay plan. To avoid the potential for inadvertent pay discrimination, it is best to utilize the same pay method for employees who hold the same position. Of course, regardless of the method of pay, all nonexempt employees must receive overtime on all earnings (including commission and nondiscretionary bonus earnings, among others) and should be required to maintain an accurate record of their daily work time, including times in and out for meal breaks.
Here are some common pay plans to consider when transitioning salaried exempt pay plans to nonexempt pay plans:
1. Continue to pay the current salary and overtime at a rate of 1.5 times the regular rate (salary divided by 40 hours). (Note: Most employees who are paid a salary believe they will receive the full salary even when they don’t work an entire workweek; so if you adopt this pay plan, it is important to clarify how you will handle the salary when the employee is tardy or absent at times when paid vacation, sick time, or PTO is not available. If you plan to pay only for actual time worked, there is no point calling it a “salary.” In this case, it’s best to use option No. 2.)
2. Convert the salary to an hourly rate that is based on 40 hours of work and pay overtime at a rate of 1.5 times the regular hourly rate. With this method, you pay only for time that is worked.
3. Convert the salary to an implicit hourly rate that is adjusted downward so that when the overtime is paid, the total earnings remain as constant as possible. Again, with this method, you pay only for time that is worked.
4. Maintain the current salary that covers more than 40 hours regularly worked and pay overtime in addition to the salary. With this method, the overtime hours that are included within the salary are paid at a half-time rate, and any hours worked beyond those included in the salary are paid at time-and-one-half the regular rate.
5. Adopt the Fluctuating Workweek pay plan that includes payment of a guaranteed salary and half-time (in lieu of time-and-one-half) to calculate the overtime. (Note: This option is only permitted in certain states, and the DOL currently prohibits employers from paying nondiscretionary bonuses and incentives to employees paid by this method.)
If you’ve been holding out hope for a DOL miracle before Dec. 1, sorry to say, the current Secretary of Labor believes it has already been granted — just not for employers. So break out the calculator and start crunching numbers. As you do, keep in mind that noncompliance is costly. To minimize your liability, before implementing any changes, seek counsel from an HR expert who is experienced and knowledgeable about the FLSA and wage and hour matters, including the new regulation, tests for overtime exemptions, pay plan options and relevant state regulations that may exceed federal requirements.