On May 18, 2016, changes to the Fair Labor Standards Act (FLSA) increase the salary an employee must earn to qualify to be exempt. Employees that are currently not eligible for overtime but make less than $47,475 per year will be eligible for overtime pay beginning December 1, 2016.
Exempt employees are not eligible for overtime. In order for an employee to be exempt, they must meet all three of the following criteria:
- Salary Basis Test: Employee is paid a predetermined and fixed salary that is not subject to reduction due to variations in the quality or quantity of work.
- Salary Level Test: Employee’s salary must meet a minimum specified amount to qualify for the exemption. This salary threshold provides employers with an objective and efficient way to determine whether an employee qualifies for a white collar exemption.
- Duties Test: Employee’s job duties must primarily involve executive, administrative, or professional duties, as defined by law.
The new FLSA regulations modify the Salary Level Test to mean no less than $47,475 per year. An employer may include ten percent of non-discretionary incentive bonuses tied to productivity and profitability. The bonus must be paid at least quarterly in order to be factored into the Salary Level Test.
Because an employee must meet all three criteria to be exempt, an employee that makes less than $47,475 per year as of December 1, 2016 will no longer be exempt.
What should employers do now? Employers should act now to identify which employees will be affected by this change. For each employee, an employer may choose to do any of the following:
- Prohibit Overtime: An employer may require employees to keep track of their hours and prohibit employees from working overtime.
- Pay Overtime: An employer may require employees to keep track of their hours and only pay overtime when it has been authorized by management.
- Increase Wages: Where an employee makes less than $47,475 per year but consistently works more than 40 hours per week, the employer may choose to increase the employee’s salary so they remain exempt.
- Impact on Other Employee’s Wages: Where an employer chooses to increase an employee’s salary to meet the $47,475 per year minimum, it should consider whether it will make a corresponding increase to other employee’s wages. For example, the exempt employee that previously made $40,000 per year received a $7,475 raise. Will the employer adjust the salary of an employee who was making $48,000 per year before the law was changed?
An employer is not required to take the same approach for all affected employees. In some cases it may choose to increase wages and in others prohibit overtime.
Please contact your Vizance associate for more information.