The U.S. Department of Labor (DOL)’s new overtime rules go into effect on December 1, 2016. Employees that you now have on salary may need to be converted to hourly if they’re under the new pay threshold amount. These employees must be paid overtime of at least 1.5 times their regular rate for hours worked over 40 in a week.

Background

Overtime Pay

The Fair Labor Standards Act (FLSA) requires employers to pay employees an overtime rate (1.5 times the regular hourly rate) for hours worked in excess of 40 per workweek.

The workweek must be seven consecutive days
It can start on any day of the week but must be consistent
If you pay every other week, you can’t average the pay period. For example, if an employee works 45 hours in week 1 of the period and 35 hours in week 2, he must be paid overtime for 5 hours, even though he only averaged 40 hours per week.

Exempt Employees

Many employees are exempt from the overtime rules. The most common exemption is for executive, administrative, and professional (EAP) employees. To be exempt under this provision the employee must meet three tests:

Salary basis test – the employee must be paid a predetermined and fixed salary

Salary level test – the amount of salary paid must be at least $455 per week ($23,660 annually). This is what’s changing – see below.

Duties test – the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.

In addition to exempt EAP employees, a few other classes of employees are also generally exempt from the overtime requirement:

Certain computer employees
Outside sales employees
Police, firefighters, paramedics, and other first responders

For more information on exempt employees, read the DOL Fact Sheet:

https://www.dol.gov/whd/overtime/fs17a_overview.pdf

The New Overtime Rules

The overtime rule changes take effect December 1, 2016

Increase in the salary level test

The salary basis test and duties test haven’t changed. The change is to the salary level test. Under the new overtime rules, to be exempt as EAP the employee’s salary must be at least $913 per week – double the current amount. That works out to $47,476 annually.

Automatic updating

The new amount of $913 per week is based on the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region. This will automatically be updated every three years.

Inclusion of bonus payments

Currently, only salary amounts can be used to determine if an employee meets the salary level test. Under the new overtime rules, employers can use certain bonus and incentive payments, including commissions, to satisfy up to 10 percent of the minimum salary level. The payments must be nondiscretionary, such as bonuses tied to productivity and profitability. The payments must be paid at least quarterly to count.

Example

An employee is paid a salary of $880 per week ($45,760 per year) and so does not meet the salary level test. However, he is also paid $500 per quarter ($2,000 for the year) in nondiscretionary bonuses, for total compensation of $47,760 for the year. The salary shortfall ($47,476 – $45,760 = $1,716) is less than 10 percent of the minimum salary level. The employee’s total compensation is over the minimum salary level. So, if the duties test is also met, this employee is exempt from the overtime requirements.

What employers are affected?

The new overtime rules primarily affect employers who have exempt salaried EAP employees with salaries under $913 per week ($47,476 annually).

What do affected employers need to do?

There are several options you can take depending on your situation.

Convert bonuses to salary to meet the minimum salary level

Suppose you pay an employee total compensation in excess of $47,476 per year, but the salary component is under $913 per week. The rest is in the form of bonuses or commissions. Only ten percent of the bonus can be counted toward the salary level test. In this case, consider converting a portion of the bonuses to weekly salary so that the salary level test is met.

Give salaried employees a raise

If you only have a few affected employees and they’re near the salary level threshold, you could simply give them a raise so that they’re over the $913 minimum. A big advantage to this approach is that you don’t need to start tracking their hours.

Convert salaried employees to an equivalent hourly rate

If it’s not feasible to raise salaries above the minimum, you need to convert salaried employees to hourly, and pay them time and a half for hours worked over 40 in a week.

First you need a system to track the employees’ hours. If you already have some hourly employees, you already have a system in place. If not, talk to your payroll provider or other business owners for ideas.

Next you must determine an equivalent hourly rate for each employee. To do this, you’ll need to track their hours. Then you can determine the equivalent hourly rate with this formula:

R = S/(40 + 1.5H)

Where R = hourly rate, S = weekly salary, and H = hours worked over 40.

Example:

Larry is currently a salaried employee earning $750 per week. You track his hours for 4 weeks and find that he works about 50 hours per week on average. So, S = $750 and H = 50 – 40 = 10. Larry’s equivalent hourly rate is:

R = S/(40 + 1.5H) = $750/(40 + 1.5X10) = $750/(40 + 15) = $750/55 = $13.64

Finally you need to talk to your payroll provider to implement the change. Remember that the new rules are effective December 1, 2016.

Convert salaried employees to hourly and prohibit overtime without authorization

Some businesses are using the new regulations as an opportunity to re-evaluate pay rates. Instead of calculating an equivalent salary, consider doing some research and setting hourly pay at local market rates. Then, require advance authorization for overtime hours. This approach will minimize the amount of overtime paid, but might require increased staffing to get the work done.

Check your state regulations

Remember that there are overtime, minimum wage, and other employee regulations at both the federal and state levels. Always check the rules in your state – they might be more restrictive than the federal rules.

Resources

Click here to see the DOL fact sheet on the new rules:

https://www.dol.gov/whd/regs/compliance/whdfs23.pdf

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