On December 1, 2016, the Department of Labor (DOL) will raise the minimum compensation for exempt employees to $47,476 annually. Salary is just part of the equation to determine who qualifies as an overtime exempt employee. The equation also includes a duties test of essential job functions, and practitioners are working hard to analyze compensation and find solutions that will avoid conflict with the new rule.
Why not just have all employees work 40 hours and get approval for overtime?
The statutory definition of "employ" is "to suffer or permit to work." The phrase "suffer or permit" to work does not mean "approve." Hence, any time a nonexempt employee works, the employee must be compensated. A nonexempt employee cannot volunteer to work off the clock, so something as innocuous as an employee arriving early to start their day becomes problematic. Common advice is to issue progressive discipline for employees who work unapproved overtime, but writing up a good employee for what they reasonably perceive to be a show of initiative can open a different can of worms.
That’s going to be a challenge. Anything else to be mindful of?
But of course! Employers must capture and record all time worked. Documenting compensable time is complicated when you consider everything that legally constitutes work time. The non-exhaustive list includes:
- Waiting or on-call time when it is on the employer's premises (for example, waiting for a shift replacement to arrive)
- Work-related training activities (including travel time if they take place off-site)
- Eating meals while checking emails or answering phones
- Work travel outside of the employee's normal commute
- Answering work emails or completing reports after work hours
- Attendance at required company functions, including volunteer activities and social events
Even with a sophisticated time-keeping system, capturing all hours is a challenge.
So what are some solutions?
If the duties test supports the classification of an employee as exempt, you can simply raise the employee's salary to meet the minimum $913 weekly threshold.
Because budgets may not support across-the-board increases in salaries, Fair Labor Standards Act (FLSA) minimum salaries can be offset by:
- Communicating to employees that this new rate will be in lieu of all or part of any annual increase or cost of living changes
- Reducing end of year bonuses or other compensation
- Requiring additional hours of work (exempt staff are not bound by 40 hour limits)
Bonus or incentive:
Alternatively, an employer could make use of the new rule that allows up to 10 percent of an employee's minimum salary to be paid through nondiscretionary bonuses, incentive pay, or commissions.
- "Nondiscretionary" means that the bonus or commission is in accordance with preannounced standards.
- Bonuses must be paid quarterly and they must be paid no later than one pay period after the end of the quarter to make up any shortfall.
- A bonus can be a flat rate or a percentage.
- The bonus can be used to account for up to $1,175 of quarterly compensation.
What if we want to continue to pay all of our employees on a salary basis, even though they may not be "exempt" under the duties test of the DOL?
One of the most common misconceptions about the FLSA is that "salaried" is the same as "exempt." Paying someone a salary does not make them exempt, nor does it make them ineligible for overtime. Employers may continue to pay all employees on a salary basis and nonexempt employees can certainly be paid less than $913 a week. This does not, however, eliminate the employer’s obligation to track and record all hours worked by nonexempt staff.
Some things to think about when weighing whether to pay nonexempt staff on a salary basis:
If an employer has a good understanding of the number of actual hours a nonexempt employee works, the employer can describe the employee's overall compensation as a combination of regular pay plus overtime for a finite number of hours.
For example: The Widget Company has been paying its (nonexempt) receptionist $855 a week. Widget Co knows that the receptionist almost always works 42 hours a week to cover the switchboard during the hours it is open. Widget Co also knows that, on at least two days, she eats at her desk because there is no lunch coverage for that half hour. So this employer knows that the receptionist works 40 regular hours and three overtime hours. In order to retain her on a salaried basis, The Widget Company might communicate to her that her salary is comprised of 40 hours at $18.00 an hour and five hours of estimated overtime (building in a buffer). The overtime component of her pay is five hours at time-and-a-half, or $135 ($27 x 5). The Widget Company will still be responsible for paying overtime if the receptionist works more than 45 hours.
Another method of compensating employees is on a fluctuating workweek basis. Under this method of payment, the nonexempt employee receives a guaranteed base salary each week regardless of the hours worked. Using this method:
- The employee must be paid a salary, which is a "fixed amount" regardless of how many hours are worked in a given week.
- The employee and employer must have a "clear mutual understanding" that the fixed salary is compensation for all hours worked in a week regardless of how many hours are worked in any given week.
- The weekly salary must be large enough such that the employee's hourly rate never falls below minimum wage.
- The employee's hours must fluctuate from week to week.
This a good method to use for employees who may work 30 hours one week but 50 the next. There is still an obligation for overtime if the hours worked cause the hourly rate to drop below minimum wage and the employer is still required to track time worked.
Questions about the new DOL standards? Contact us at firstname.lastname@example.org.