The US Wage and Hour Division announced sweeping changes to the regulations that define exemption rules from the overtime provisions under the Fair Labor Standards Act (FLSA). Many Small Business owners understandably have concerns as it relates to the new requirements, specifically the salary requirement of $47, 476 a year or $913 per week. While the new rules do not take effect until December 1, 2016, let’s take a quick look at them and how they will impact a small business.
The very first thing any business owner needs to take into consideration is whether or not their business falls under the FLSA. For most small businesses, the first decision point they will face is whether or not their Enterprise (business) is covered by the law. Under the FLSA the rule is pretty clear and is contained in Fact Sheet #14 from the Wage and Hour Division;
Employees who work for certain businesses or organizations (or “enterprises”) are covered by the FLSA. These enterprises, which must have at least two employees, are:
(1) those that have an annual dollar volume of sales or business done of at least $500,000
(2) hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies
If you meet either of those criteria, then the new rules apply to your business. If you do not, then while you are exempt from these rules you should still remain aware of them and understand how they can impact the wages you do pay to your employees.
The Final Rule focuses primarily on updating the salary and compensation levels needed for EAP workers to be exempt. Specifically, the Final Rule:
- Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which is $913 per week or $47,476 annually for a full-year worker;
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004; and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. The Final Rule makes no changes to the duties tests.
What exactly does that mean?
Salary Level – in order to meet the criteria under the Fair Labor Standards Act to be exempt from overtime certain pay standards must be met. One part is that the weekly salary must be at least $913 and the other is that the weekly pay is not reduced because of the quantity or quality of work.
Use of nondiscretionary bonuses – These bonuses are a part of a defined incentive plan. In other words, you have a plan where if an employee performs at a certain level or accomplishes certain things they get a bonus. 10% of these bonuses can be applied to the salary to meet the requirements.
Duties tests – Certain types of positions may be exempt from the overtime provisions of the FLSA. These are generally classified as Executive, Administrative, Professional, Computer employees, Outside Sales and Highly Compensated. More on these can be found in this Fact Sheet. (note: the weekly salary rates in this fact sheet are currently inaccurate. You must use the new rate of $913).
Salaried exempt – a classification of employee that is exempt from overtime because they meet both the salary and duties test.
It is important to note that Blue Collar positions are generally always eligible for overtime (non-exempt).
If your business is affected by these changes you should do the following:
Review your current Salaried exempt positions for the following:
- Do they meet the salary test
- Do they meet the duties test for the type of position they are?
If they meet those tests you need do nothing.
If they do not meet those test you should consider one of the following:
- If they meet the duties test but not the salary test;
- Consider increasing the salary to at least $913 per week, or
- Leave as is, convert the employee to an hourly rate and manage their time and performance to limit overtime (currently at 40 hours per week under the FLSA)
- If they meet the salary test but not the duties test;
- Remember that they must meet BOTH salary and duties – salary alone is not enough.
- Review their duties. If adjustments or changes to their duties can be made that would place them in an exempt status, consider making those changes and keeping them as salaried exempt.
- If changing their duties is not possible, convert the employee to an hourly rate and manage their time and performance to limit overtime (currently at 40 hours per week under the FLSA).
No matter what impact these new changes have on your business, this is an excellent time to review your wage classifications. Using this brief article, and the hyperlinks to Wage and Hour fact sheets, should make this an easy project for you. Remember too that changes could well have an adverse impact on your budgeting. You will want to review that as well.