Higher Salary Minimum Requirements Announced for Overtime Exempt Employees
The U.S. Department of Labor (DOL) today, May 18, 2016, issued a new rule increasing the minimum salary that must be paid to employees not entitled to overtime pay. The new minimum salary roughly doubles from its present level of $23,660/year ($455/week) to $47,476/year ($913/week), effective December 1, 2016. The minimum level for the “highly compensated employees” overtime exemption category also increases from its present level of $100,000/year to around $134,004/year. These changes will put employers under significant pressure in two important ways.
First and obviously, any employee now exempt from overtime pay under one of the main job duties based exemption categories whose salary remains below the new minimum will be legally required to be given overtime pay. Also, the regulations index the new minimums to change every three years, starting January 1, 2020. The overtime exemption salary for most exemption categories (those other than the “highly compensated executive” category) will be indexed to the 40th percentile of earnings of full-time salaried workers in lowest wage Census area, which presently is the South (which is the statistic used for setting the above new minimums). The minimum salary for the “highly compensated employees” is based and indexed on the 90th percentile of full-time salaried workers nationally. A new DOL provision regarding salary calculations under the just announced rule allows employers to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the standard salary level, provided these payments are made on at least a quarterly basis (or a quarterly catch-up payment is made). However this addition is likely to provide little to no relief as most exempt employee bonuses are discretionary; and, for those jobs traditionally receiving commissions, namely sales positions, the applicable overtime exemption category—outside sales—is already different in that it does not require a minimum salary.
DOL gave just over six months’ notice of this final rule to allow employers time to adjust. While varying between employers, there will be some notable adjustments. DOL estimates that nationally there are 4.2 million employees currently treated as exempt from overtime pay who have a salary between the present and new minimums. There are an estimated 185,000 such employees in Pennsylvania alone – almost twice the national per state average (134,000 estimated in Ohio, 17,000 in West Virginia, 278,000 in New York and 80,000 in Maryland).
Going forward, employers will have the choice of either raising the pay of employees whose salary is below the new minimum or converting those employees to be given overtime pay. This will place a notable cost burden on some employers and raises questions about how to calculate overtime pay rates for these employees. The new rule does state that employers can reduce the base salary for employees who will be changed to receive overtime pay as a result of this new rule so as to keep their pay, with overtime, at a compensation level similar to what it was (while not likely to be done by many employers for morale, retention and union avoidance issues, it is questionable whether the DOL can prevent employers from setting a new pay rate below the current equivalent or effective hourly rate based on the salary of those employees converted to hourly pay as a result of this new rule, as long as the new pay meets minimum wage requirements). The new rule may also require more management oversight and workplace policy changes for those employers pressured to better manage their overtime costs.
Secondly, the publicity that will accompany the new regulations will prompt many employees, including those paid more than the new minimum, to look into and challenge their overtime exemption status. The information that will come from the DOL and others, including plaintiff/employee law firms, will focus not only on the new salary minimums but will also point out that many people paid above the new salary minimum may still be entitled to overtime pay because many employers do not understand and do not properly apply the other requirements that must be satisfied to treat an employee as exempt from overtime pay (or there will be at the least descriptions of who is covered by these exemption categories which will cause many people to challenge whether they fall into one of these categories). There are complex and subjective criteria or tests that must be met based on job duties for an employee to be treated as exempt from overtime pay under the main exemption categories (plus a few exemptions based on select industries). There are also rules regarding when an employer can and cannot make payroll deductions when an exempt employee doesn’t work a full week. If any of these requirements are not met or any of these rules not followed, the non-compliant employer is liable for damages of up to double pay at overtime rates for past overtime hours for not only the offended or complaining employee but for all employees covered or subject to the improper employer pay rule or practice for up to the last three years, plus attorneys’ fees in the event of a lawsuit. It is these difficult to understand and apply wage and hour rules and the availability of class actions, double damages, and attorneys’ fee awards that have caused an explosion in the number of wage and hour lawsuits in recent years. The attention given to the new regulations will further publicize and increase this problem.
You can stay ahead of these issues by reviewing your present employees’ status and pay rules. Employees will be reviewing and should review whether they are properly classified and paid. The first obvious pass for employers to review is to identify those employees you treat as exempt from overtime pay who are paid less than the new minimum salary – $913/week ($47,476/year).
You should also review whether your pay practices comply with the salary pay requirements (namely, that you only make deductions permitted by wage and hour law to an exempt employee’s pay when he/she does not work a full week’s work schedule). In addition, to avoid questions and challenges from overtime exempt employees paid over the new minimum salary, you should also review whether you have improperly classified anyone as overtime exempt who does not meet the required job duties tests. The most common wage and hour violation by employers is treating employees as exempt who do not actually meet the job duties tests. There are also many employers who do not understand what pay deductions are and are not permissible when an exempt employee misses some time from the regular work schedule.
The job title alone, and even the job description, is not enough to rely on to treat someone as exempt from overtime pay. The actual work done by the employees and the level at which they do that work is the key to whether an overtime exempt based on job duties is satisfied. There are four main categories of exempt employees based on their job duties:
- administrative, and
- outside sales.
These are the labels used by the U.S. Department of Labor; and, due to complicated and subjective regulations and court decisions, they are not well understood and are frequently misapplied. It is not enough for an employer to say it designates or regards certain employees as being, for example, “professional.” The job duties tests for these categories must be met and they are not simple or short. This is a source of many claims by employment lawyers seeking back overtime pay. It is common for an employment lawyer consulted by an employee over a job separation to inquire whether the employer properly applied wage and hour rules to that employee and the other employees working for that employer.
Rather than greatly increasing the length of this article to describe these job duties tests, we recommend two initial steps on your part. The author of this article has prepared a self-audit questionnaire for a nominal fee for employer use to review their wage and hour practices. One part of our questionnaire covers who can be treated as exempt from overtime pay. The other part covers other pay practice requirements (e.g., what time has to be considered pay time, such as travel time, training time, break time, on-call time, etc.). The questionnaires are written in a way to identify many problem areas where changes should be made. Please request a copy of this questionnaire from one of the attorneys listed at the bottom of this article or our Employment Law Group Paralegal/Administrative Assistant also listed below.
Employers should bear in mind that there may be choices and options available. For example, if someone has been treated as exempt from overtime pay who doesn’t meet the applicable job duties tests, an alternative to switching them to receive overtime pay is to revise their actual job duties to satisfy one of the overtime exemption categories. There may also be pay alternatives to switching someone to hourly pay. Although, it should be pointed out that based on some court decisions, Pennsylvania employers are more limited than those in other states regarding alternative methods available to pay overtime to a salaried employee. The options and choices regarding changes to deal with overtime exemption categories and the new salary minimums should be discussed with one of the undersigned employment law attorneys to account for and work with your particular circumstances.
Whether you are deciding if you have properly classified employees as exempt from overtime pay, if you are following the rules for what deductions from salary can and cannot be taken for time missed by an overtime exempt employee, or if you are deciding how to set the pay and overtime rates for those presently exempt employees below the just announced new minimum salary that you do not wish to raise up to the new minimum salary, there are important choices and options to consider.
The general rule is that overtime must be paid at a rate of at least one and a half times the employee’s regular rate of pay. There are options on how to calculate the regular rate of pay. The rules on calculating overtime vary by state, with a notable issue in Pennsylvania regarding one option that is less expensive for employers than traditional hourly wage rate based overtime pay calculations. Court decisions have not accepted this alternative (known as the fluctuating workweek pay method) in many situations. These overtime rate calculations for salaried employees will be the subject of an upcoming article by the author of this update.
There are also a few jobs—doctor, lawyer, teacher and computer programmers (computer programmers in some states such as Pennsylvania are not eligible for this hourly pay overtime exemption treatment)—who can be paid hourly rather than salary and still not be entitled to overtime pay, provided they perform work that qualifies under the job duties test applicable to them (i.e., under the professional exemption category).
Please contact one of the undersigned Houston Harbaugh, P.C. employment law attorneys to discuss this subject or to request our employer self-audit wage and hour questionnaire for your own review: