Your ‘salaried’ employees may soon be eligible for overtime.
The U.S. Department of Labor has just announced an increase in the wage threshold amounts for determining whether an employee is exempt (salaried) or nonexempt (hourly and, thus, overtime eligible).
The new rules are set to take effect in December and could entitle more than 4.2 million workers to overtime pay.
Put simply, more of your employees may now be entitled to more pay under federal law by the end of the year.
Understanding Exempt vs. Nonexempt
First, it’s really imperative that you understand the differences between an exempt and a nonexempt employee as the rules currently stand. These rules are covered by the Fair Labor Standards Act (FLSA) and it’s an area where business owners often struggle. If you are not familiar with the difference between exempt and nonexempt, the Labor Department has a good explanation at 1.usa.gov/1LsM4UQ.
Many mistakenly believe they can just put a person on salary because the person always works exactly 40 hours or the person has an advanced degree so therefore they qualify. But that isn’t necessarily the case.
It’s the job employees have with you that dictates whether they are exempt or nonexempt. For instance, if a lawyer with an advanced degree is working as a paralegal, you might be tempted to call that person exempt, but that’s not correct, because the paralegal job does not qualify for exemption. Therefore, the person in that role is nonexempt and is eligible for overtime.
In most states, overtime is paid at 1.5 times the base hourly rate and owed when an employee works more than 40 hours per week in any one workweek, though this can vary by state.
There are actually a couple of proposed changes, but the biggest (and potentially the thorniest) is probably the wage threshold.
At this point in time, assuming that other exemption requirements are met (and please, please, please familiarize yourself with the rules at the link above) employees can be considered exempt (or salaried) if they are paid $455 per week on a salary basis or just $23,660 annually. The new rules, starting on Dec. 1, 2016, will raise this amount to $913 per week or $47,476 annually.
And this is where you need to pay attention. Even if you currently have employees on staff that have positions that are considered exempt or salaried under all other provisions of the regulations, if they are making less than $47,476 annually, they can no longer be considered exempt once the new regulations go into effect.
What Does This Mean to You?
If you’re currently employing exempt or salaried employees, and they are making less than $47,476 per year, then as of the date the regulations change, they will be considered nonexempt and will become eligible for overtime. Right now, in order to be prepared, you should be determining:
- Who on your staff falls into this category?
- How will this affect your payroll?
- What timekeeping measures will you put in place? (Because you have an obligation to track nonexempt employees’ working hours.)
- And how will you communicate these changes to your employees to let them know about this change in their status?
Think of it this way. If someone is routinely working 50 hours a week as an exempt employee, and that person becomes an hourly employee under the rule change, you’re looking at an increase of about 37.5 percent. Most small businesses I know won’t be able to absorb that without some forethought.
Last but not least, if you’re a smart cookie, this might be time to seize the moment and determine whether you have your employees classified properly in the first place. All too often, small business owners truly don’t have their ducks in a row when it comes to FLSA classification.