Making Sense of the new Overtime Salary Threshold Rule

When the US Department of Labor started talking about changes to the Fair Labor Standards Act (FLSA) way back in 2014, employers, employees, and their attorneys thought they had plenty of time to deal with the government’s plan to extend overtime pay to more than 4 million salaried workers. And yet, the new overtime threshold which takes effect on December 1, 2016 has caught many still unsure and unprepared.

As of today, salaried workers who earn less than $23,600 annually ($455/wk) are eligible for overtime pay for work beyond the standard 40 hours per week under the FLSA. Workers who earn below the current threshold amount are considered non-exempt, or hourly workers. On December 1, however, the threshold for exempt workers will double to $47, 476. That means a salaried employee who earns less than $47, 476 will receive overtime pay equal to one and a half times their regular rate of pay for work beyond the standard forty hours per week. Keep in mind that certain jobs such as physician, teacher, lawyer, police and first responder will remain exempt from the FLSA guidelines, as will those of non-exempt workers.

What Does This Mean for Employers?

Although it will impact employers in every category, it seems that the potentially dramatic increase in payroll will have the biggest impact on small and medium sized businesses. Any business with a substantial part of its workforce earning salaries over $23, 660, but less than $47, 476 has some tough decisions to make. Will it simply begin paying overtime where none has been paid in the past? Or will it raise the salaries of exempt employees to exceed the threshold and avoid calculating and paying overtime?

There seem to be three fairly clear cut choices for employers to consider depending on their business’ resources and needs:

• Pay overtime when necessary. Employees that continue to be salaried and now earn less than the threshold will earn overtime. There is no requirement that salaried employees convert to hourly employees to calculate overtime pay at time and a half.
• Raise workers’ salaries to the new threshold level, or beyond, to maintain exempt status. Keep in mind that an exempt employee must also meet the “duties test” as determined by FLSA Regulations. In other words, an employee meets the “duties test” if her duties are truly those of an executive, administrator, professional, IT, or outside sales employee. This determination can be complex, so consult with an attorney to obtain more information on this issue.
• Evaluate and realign the staff and hours so that workload distribution, time and staffing levels are maintained for white collar workers who are below the exempt threshold. This may mean hiring additional staff in some cases.

Each employer will consider the options from the perspective of his own business when determining which choice to make.

What Does This Mean for Employees?

Some employees will find the changes extremely positive. If you are one of the lucky ones whose employer simply chooses to increase your salary to $47, 477 to avoid paying you overtime, go ahead and celebrate. But there probably won’t be a lot of you in this category. In addition, workers who have been taken advantage of in the past by having to work longer hours will now be compensated for their additional efforts. Another positive change.

Some changes though, might not be viewed quite so positively. Exempt workers who earn between the current threshold and the new one might be “demoted” to non-exempt status. While the work will not change, a newly non-exempt employee might see her base salary lowered to make up for the overtime that will certainly be paid. And vacation time or “comp-time” will be limited or eliminated.

And for some employees, there is a concern that employers will split full-time jobs into part-time jobs in order to 1) avoid having to pay higher salaries or overtime, and 2) create jobs that may not require benefits such as health care or child care. These concerns should be minimal, however. Employers that recognize the value of their workforce won’t act erratically to jeopardize a successful business environment by lowering morale.

Preparation… Bringing Clarity to a Changing Enviroment

During this time of uncertainty, one thing is clear, both employers and employees should seek the advice an employment law specialist to ensure the seamless continuation of a strong business and a positive work environment thought this year and well into 2017.

If you are an employer or employee with questions regarding the new salary thresholds please contact Pometto Law now at (412) 887-3851.