As of December 1st most employees whose annualized salaries are less than $47,476, will be entitled to overtime pay even though their job duties would otherwise qualify for an exemption as executive, administrative or professional. A federal court in Texas is expected to rule next Tuesday in a lawsuit brought by employer groups seeking to enjoin the DOL's new rule from going into effect on the 1st; however, based on previous rulings in similar suits employers can hardly count on a court ordered reprieve. Consequently, in the final days before sweeping changes are mandated by the DOL's deadline to more than double the minimum salary necessary to qualify for any of the so-called "white-collar" exemptions, employers are scrambling (and our phones are ringing). Because so many employers remain unprepared for the sweeping changes (and exposure to lawsuits and liability) coming just around the corner, this article will identify some common misunderstandings that are leaving thousands of employers exposed - see if any apply to you!
1. Many employers continue to believe that if an employee is paid a salary, the employee is
"exempt" and need not be paid 1 ½ times the regular rate pay in overtime for hours worked in excess of 40 in any workweek. This assumption is just dead wrong! To be exempt from overtime an employee must meet all three of the following: 1) must perform exempt job duties; 2) must be paid a salary; and, as of December 1st 3) that salary must be at least $47,476/year ($913/week). Failure to satisfy any one of these three requirements makes the employee non-exempt and entitled to overtime pay.
2. Many employers are mistakenly relying on other, non-salary forms of compensation to meet the new minimum salary. We often hear employers say they are not concerned with the Department of Labor's new minimum salary, even though it doubles the current minimum, because they "pay" or "compensate" their exempt employees well beyond $47,476 per year. The problem is that, with one very limited exception, only pay in the form of a salary counts toward the new minimum set by the D.O.L.
The only exception is that bonuses, incentive pay, or commissions may be added to an employee's salary towards the new minimum, only if they are non-discretionary (i.e. guaranteed by formula or otherwise) and then, they can comprise no more than 10% of the new minimum salary. This means that 90% or more of the new minimum salary must be in the form of a salary that is paid regardless of hours worked. Doing the simple math, this means that no more than $4,748 of the new minimum can come from bonuses, etc. For example, even if an employee makes $100,000 in total compensation, he/she will not be exempt from overtime under any of the white-collar jobs unless, at a minimum, $42,728 of that compensation is paid as a salary and any additional compensation must be non-discretionary and meets one of the limited forms acceptable under the new rule. Because these nuances are frequently misunderstood, any employer that plans on relying on bonuses or other compensation to meet the new minimum salary is well-advised to consult with knowledgeable legal counsel to determine if it is allowed.
3. A significant number of employers assume that converting exempt employees to non-exempt employees because they will not meet the new minimum salary, can be easily done. Oversimplification of what is entailed with converting exempt employees to non-exempt, is a recipe for disaster! This requires far more than a simple change in payroll. Most notably, affected employees who in the past have never had to track their hours worked, must begin doing so as of December 1, 2016. But many employees who perform exempt duties do things that blur the lines between compensable and non-compensable work time, much more so than traditional hourly workers. What about travel time? Attending trade or civic events that benefit the company? Checking/replying to emails, etc.? Addressing these various issues can be complicated and take time, and there is barely any time left before the new rules go into effect on December 1st, 2016.
4. One potential positive from the new DOL Overtime Regulation, is that the changes going into effect December 1, 2016, present as good a time as any to "fix" misclassified employees who do not clearly meet the required duties to be exempt from overtime pay. With millions of workers possibly being reclassified from exempt to nonexempt as a result of the new minimum salary rule, including employees whose duties are more appropriately classified as nonexempt in those who are reclassified, could potentially drawing less attention to the change.
On a final note, there are several ways to convert compensation for employees who must be "reclassified" from exempt to non-exempt status. While changing pay from salary to hourly pay is permissible, it may not be the best approach for many employers, or employees. Without careful planning, employers could wind up paying more in 2017 than if they had increased some salaries by many thousands of dollars to meet the new minimum set by the D.O.L. So, with just days left to plan, employers who have yet to address these issues or who have mistakenly thought they were easily addressed, may be in for a rude awakening.