With the new overtime rule under the Fair Labor Standards Act (FLSA) going into effect on December 1, 2016, employers should be making their final decisions and preparing to comply with the new requirements.
The new rule raises the salary threshold under which an employee is entitled to overtime. Under the new rule, employees earning a salary of less than $47,476 ($913 a week) will automatically qualify for overtime pay when the employee works more than 40 hours a week, or eight hours per day depending on the state the employee is working in. Currently, the exempt minimum salary threshold is $23,660 ($455 per week). The change doubles the exempt minimum wage for salaried workers.
Here are three action items to help employers prepare for wage and hour compliance.
1) Traditionally, the definition of salary under the FLSA did not include bonuses or commissions. Effective December 1, up to 10 percent of the minimum salary level may be paid through non-discretionary bonuses, incentive pay, or commissions to meet the minimum salary threshold. In order to satisfy this requirement, employers must pay employees’ bonuses and commissions at least quarterly and evaluate the payments each quarter to ensure the employees’ earnings meet the minimum requirement of $11,869 per quarter. Employers will have one pay period after the quarter to make up for any shortfall.
The Department of Labor (DOL) defines nondiscretionary bonuses and incentive payments (including commissions) as “forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. Examples include bonuses for meeting set production goals, retention bonuses and commission payments based on a fixed formula. A discretionary bonus is defined as “those for which the decision to award the bonus and the payment amount is at the employer's sole discretion and not in accordance with any preannounced standards. An example would be an unannounced bonus or spontaneous reward for a specific act.”
Action Item: For employers who are planning to utilize bonuses and commissions to meet the minimum salary threshold, confirm that the employee is earning a salary of at least $822 per week because bonuses and commissions can only account for 10 percent of the employee’s earnings to comply with the minimum requirement. Ensure that the bonus and commissions meet the DOL’s definition of non-discretionary bonuses and incentive payments.
2) Part-time employees paid on a salary basis must earn, at least, the exempt minimum salary of $913 per week or the salaried amount of $47,476 annually. Some employers are surprised to find out that they can’t prorate a part-time, salaried, exempt employee’s salary if that proration would result in them earning less than $913 per week. Paying an employee less than this amount per week results in them not qualifying for the salary exemption. The standard of $913 per week is the standard regardless of how many hours someone is scheduled to work.
Employers facing this scenario will need to make decisions regarding increasing an employee’s salary to meet the minimum threshold or converting employees to hourly, non-exempt with overtime eligibility.
Action Item: Review the salaries of part-time employees to assess compliance with the new minimum salary threshold. Increase salaries as needed to meet the requirement of $913 per week (or $822 per week if non-discretionary bonuses are also a part of an employee’s earnings.) Consider moving part-time employees to an hourly status. If employees will be changed to hourly, communicate this change by describing their eligibility for overtime, rest breaks and meal periods, including the importance of recording their time worked. Managers must also be instructed on the policies and practices of managing non-exempt employees.
3) The new annual exempt salary requirement of $47,476 effective December 1, has received a lot of attention over the last six months. Employers must also prepare for the many state and city minimum wage increases that will go into effect on January 1, 2017, and throughout 2017. California and New York are introducing hourly minimum wage rates based on the number of employees an organization employs. For example, California’s minimum wage is $10 an hour for an employer with 25 or fewer employees effective January 1. An employer with 26 or more employees must pay California hourly workers $10.50 per hour effective January 1.
Action Item: Review the hourly rate you are paying each non-exempt hourly employee. Compare the current rate to the new rates effective throughout 2017. Communicate the rate changes by providing employees with a written notification of their new rate of pay and effective date of the change.
This communication is for informational purposes only; it is not legal, tax, or accounting advice; and is not an offer to sell, buy, or procure insurance.
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