On May 18, 2016, the U.S. Department of Labor issued its Final Rule changing the threshold payment limits for defining “exempt” administrative employees—meaning employees exempt from the application and payment of overtime.  It updates the minimum compensation thresholds for both administrative and professional (highly compensated employee) compensation.  These changes take effect December 1, 2016.

The FSLA Changes:

  • Compensation threshold for overtime for salaried employees goes from $23,660/year to $47,476/year.
  • The threshold salary exemption for highly compensated employees (HCE’s) increases from $100,000/year to $134,004/year.
  • Non discretionary bonuses, incentives and commissions may be used to satisfy up to 10% of the compensation threshold if paid at least quarterly.

The Solution:

For most business doubling salaries or increasing compensation for existing HCE’s by up to 33% is not a financially realistic, or profitable solution.  There are essentially four options for the business.  That involves business management determining their economic and financial viability under these new rules and evaluating each position to see what positions and employees fit the overtime exemption requirements.  There is a misconception that any salaried employee is exempt from overtime, that is true only if they also meet the duty exemption.  Thus, in many businesses, it is possible that they are paying clerical or administrative personnel on a salary to avoid overtime but those employees do not otherwise meet the duty exemptions for such positions.

This is a good moment in time to review and re-define job duties.  For persons that Management wants to be exempt from overtime and perceives to be valuable to their business, it may mean giving that position more discretion and independent judgment on aspects of their duties that are significant to the business’s smooth operation.  For those that Management does not want to pay the increased compensation, it may mean that Management should enact new rules and practices that restrict working of overtime except under defined circumstances and case by case approval of Management in advance of any overtime work.

Another possibility is to take some previously salaried employees that are not critical and convert them to hourly employees.  In that way, the business avoids a potentially large compensation increase and then can control when and for what purposes that employee is authorized to work and earn overtime.

While not immediately, it is foreseeable that the Department of Labor will begin to investigate or audit employers to see if they are paying and applying the standards for paying overtime properly.  Without taking action to address their labor force, a business is at risk of merely increasing salaries for salaried employees and upon an audit, having the Department of Labor determine that they do not meet the duty exemption standards, so that they would be owed overtime at a higher rate of pay, plus possible interest and penalties.  While it may take a process of a few years for the Labor Department to conduct such audits, particularly of smaller employers, there is the still the risk of being found in violation and looking backward as to the how far any potential violations occurred.  Any violations likely will carry interest and penalties.

Conclusion:

Compliance with the Department of Labor’s new FSLA overtime exempt threshold standards is more than a simple mathematical or monetary decision.  It is important that the business consider each of its job descriptions and responsibilities.  It may be time to update those job descriptions or re-write the employee manual to ensure that it has properly applied both standards, the compensation and duty standards necessary to keep its key employees exempt from overtime payment requirements.

For reference, the duty exemptions, in addition to the compensation limits set forth above, are as follows:

Executive Exemption: 

  1. Their primary duty is managing the enterprise or business or some division or subdivision of the business or enterprise;
  2. They must customarily direct the work of at least two other full time employees (or their equivalents); and
  3. They must have authority to hire or fire other employees or have significant influence on the hiring and firing of other employees.

Administrative Exemption: 

  1. They must engage in office or other non-manual labor directly related to either management, the operation of the business or the business’s customers; and
  2. their primary duty must include the exercise of discretion and independent judgment respecting matters of significance.

Professional Exemption: 

  1. Their primary duty is the performance of work requiring advanced knowledge, meaning primarily intellectual in character and consistent with the exercise of discretion and independent judgment;
  2. The advanced knowledge is in a field of science or learning; and
  3. The advanced knowledge is ordinarily acquired by a prolonged course of specialized intellectual study.

Computer Exemption: 

The employee must work as a computer systems analyst, computer programmer, software engineer or other similar skilled worker performing the following duties:

  1. Application of system analysis techniques and procedures 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 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 above that requires the same level of skills.

For more information, contact Sheldon Korlin at skorlin@aegisps.com.