First of all a little background: This act defines who is and is not entitled to overtime wages when working more than 40 hours per week. Employees can qualify as “Exempt” from the act for a variety of reasons, but they are not exempt just because they are paid a salary (as opposed to hourly).
In order for an employee to be classified as exempt, his or her job must pass three tests. The employee must:
- Be paid at least the minimum weekly or yearly dollar amount as mandated by the Dept. of Labor.
- Be paid on a salary basis.
- Perform specific job duties.
These specific exempt job duties are broken into five classifications:
- Executive – Executive job duties must include supervision of 2 or more employees and input on personnel decisions such as hiring, work duties or promotions.
- Professional – Professional job duties include well educated specialists like attorneys, doctors, teachers, architects, accountants and nurses.
- Administrative – Administrative job duties must require an exercise of discretion and judgment with the authority to make independent business decisions without immediate supervision. For example, human resource, finance, payroll, marketing and advertising professionals are all generally exempt. Your administrative assistant probably is not.
- Outside sales – outside sales professionals whose primary job duties are sales conducted outside of the office are exempted.
- Some computer related jobs – Computer related job duties need to include performance of high level work that involves significant decision making. Examples could include the duties of network, internet and database administrators.
In addition to these five classifications, employees that are “Highly Compensated” can be exempted even if they don’t pass the duties test.
The changes just signed into law and taking effect on December 1, 2016 have adjusted the salary thresholds for all exempt positions and the Highly Compensated exemption. The standard threshold for exempt employees has risen to $47,476 from $23,660, so this means that in order to qualify to be exempt from the FLSA an employee must make at least $47,476 per year. The threshold for Highly Compensated individuals has risen to $134,004 from $100,000. In addition, benchmarks have been set to adjust both of these thresholds for inflation.
One important note, the Department of Labor expects written justification of an Exempt classification. If investigated, the Department of Labor will be looking for your Compliance Plan. Within it should be a stated policy and workflows that outline how you arrive at Exempt or Non-Exempt classification decisions. When in doubt, the DOL has workflows tools online to answer any gray areas: Visit http://www.dol.gov/elaws/esa/flsa/overtime/menu.htm. Failure to pay overtime could result in 2-3 years of back pay per affected employee plus back payroll taxes and fines. This is an expensive mistake to make!
So now finally, what does this mean to you? If you have employees that have been classified as exempt that do not meet the minimum salary threshold ($47,476/year), or if you have employees that you were relying on the Highly Compensated Employee exception for exemption that are making less than $134,004/year you have three options:
- Raise their salary to the threshold. Remember, these thresholds will now change annually so you will need to continue to keep pace.
- Change them to salaried non-exempt. You can continue paying them salary, and will also have to pay them overtime for any hours worked over 40 in a week. You’ll need to start tracking hours.
- Change them to non-exempt hourly. You’ll need to start tracking hours
Some final thoughts:
Rolling this out to employees needs to be done thoughtfully. Even though employees may now be eligible for overtime, some may take the reclassification to non-exempt as a demotion
The exemption is based on the position, not the employee. If you have some folks classified as exempt and some as non-exempt in the same position, you’re likely to get yourself into trouble.
If you have any questions or concerns, talk to an expert.
This is a great opportunity to make sure all your employees are correctly classified.