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Starting December 1, 2016, a new overtime rule goes into effect that employers should be aware of that will impact employees on salary. The Fair Labor Standards Act (FLSA) is a federal law that applies to all employers across the country. It guarantees a minimum wage to all employees as well as overtime compensation if over 40 hours a week is worked. Overtime pay is calculated at a rate not less than one and one half the employee’s regular rate of pay for all time worked in a week in excess of 40 hours. Many employers are under the mistaken belief that if they pay an employee a salary that the overtime laws do not apply. This is incorrect. Weekly salary divided by 40 (hours) must not be lower than the federal minimum wage then in effect. As with any law there are exemptions and this is the focus of the new overtime law for salaried employees.
Under the law as it currently stands, there are overtime exemptions for employees who perform professional, executive, administrative, outside sales or computer functions. These exemptions are referred to as white collar exemptions. To be considered exempt, employees must meet certain minimum criteria related to their primary job function and must be paid on a salary basis of not less than a specific minimum amount set by the Code of Federal Regulations (CFR). Today that minimum amount under the CFR is not less than $23,660 annually which translates to a weekly salary of $455. Stated differently, your employees are not entitled to overtime pay if you pay them at least $455 a week and their primary duties fall under the “white collar” exemptions.
Effective on December 1, 2016, this changes drastically and modified white collar exemptions will be put in place. The minimum amount required to be paid on an annual basis will be increased to $47,476, which translates to $913 a week. If an employer pays its employee a salary of less than the $913 floor, the employee will now be entitled to overtime. In addition, the highly compensated exemption will be increased from $100,000 to $134,000. The new law also has automatic increases every 3 years tied to certain performance indices.
The new overtime rule goes into effect in approximately 6 months. Employers should be using this time to get ready for the new overtime law for salary employees. There is no one “best” way to prepare for all employers due to the various constraints that are unique to an individual employer. For example, an employer with 10 employees in one location will have different needs than an employer with 500 employees. Along this same line of thought, two corporations that both employ 500 employees will have different issues if one company conducts business out of one location while the other employer has 15 offices across the country.
At an absolute minimum we suggest that employers should start by conducting an audit of all salary employees who have an annual salary of between $23,660 and $47,476. This is a good time to review the job descriptions and duties of each of these salaried employees to determine if they fall within the exemptions. Special attention should be paid to determine if the employee’s actual duties match the job description and fall under the white collar exemptions.
Next, a plan needs to be put into place that addresses salaried employees that will be (or should have been) receiving overtime. If compensation and hours are to stay the same, it’s time to notify your employees that this new law will apply to them and notify them of any new procedures to track hours. Not only will a system have to be implemented to record time accurately, but also procedures need to be implemented to limit overtime. Perhaps it’s as simple as giving the employee a slight raise to bring him or her above the new threshold? Perhaps it is just a reduction in hours worked per week? Whatever strategy is chosen, this is not just a monetary compliance decision. This will impact employee morale and needs to be communicated carefully. Also, care needs to be given when bringing change to the workplace that you as the employer are not unintentionally favoring one class of people over another on the basis of sex, religion, age or other potentially discriminatory basis.
Finally, please recognize that the minimum wage under the FSLA is a floor and that while a state may not go below that floor, states are free to set their own minimum wages as they see fit. The current minimum wage in Pennsylvania at the time this article was posted is $7.25 per hour and in New Jersey it is $8.38 per hour.
Douglas Leavitt is an attorney with Danziger Shapiro and focuses his practice on guiding business with their daily operational needs. Please feel free to contact him or any of the other attorneys at Danziger Shapiro to discuss how this new change will affect your business or any other issue you may have that concerns you and your business.
This entry is presented for informational purposes only and does not constitute legal advice.