In May, we reported that the Department of Labor (“DOL”) had released its final regulations on overtime exemptions, sharply increasing the salary threshold required for an employee to be considered exempt from overtime under the Fair Labor Standards Act (“FLSA”). This threshold applies to most of the so-called “white collar” exemptions to the overtime provisions of the FLSA.  The final regulations change the threshold for eligibility from $455.00 per week to $913.00 per week, or from $23,600.00 per year to $47,476.00 per year.

The final regulations also require an automatic increase in the threshold amount, to occur every three years, and to be based on the 40^th percentile of salaried employees in the lowest wage area of the country at the time of the recalculation.  This means that, even though the threshold is now $47,476.00 per year, it probably will rise precipitously every three years, as fewer employees are maintained on a salary basis.

The increase is to go into effect December 1, 2016. If you have employees who you consider to be exempt, but who make less than $47,476.00 per year, you need to consider your options and act now to ensure your company is compliant on December 1, 2016 and thereafter.

The threshold affects employees who are considered exempt under the executive, professional, or administrative exemptions to the overtime provisions of the FLSA.  (While the FLSA also allows an exemption for highly paid individuals, that exemption is not available in Pennsylvania.)  If you have any such employees, you should:

1. Review the status of all employees subject to the affected exemptions. In addition to meeting the threshold, employees must also meet the duties test for a particular exemption and must be paid by salary. Each of these prongs of the exemption test is important. Information about the duties for various exemptions is available on fact sheets at the DOL’s website, which also has fact sheets on what it means to pay employees on a salary basis.  Generally, payment on a salary basis means that the employee’s wages are not subject to change based on the quantity or quality of work. This means that salaried employees cannot have their paychecks docked, for example, if they are late to work.
2. Think about options for employees who currently are exempt, but will not meet the salary threshold.  Assuming they meet the salary and duties requirements, if currently exempt employees will not meet the new threshold, you have some choices.  Depending on your situation, one solution may work better than another, and you may choose different solutions for different employees.
   1. A.  Raise the employee’s salary to the new threshold amount.  If an employee is close to the threshold, you may wish to raise his or her salary to the new threshold amount.  You should consider whether issues of wage compression will make this difficult.  You should also keep in mind that the threshold will rise by an unknown amount in three years, and you may be facing the same issues again at that time.
   2. B.  Pay the employee an hourly rate. If the employee does not usually work overtime, the solution may be simply to pay him or her on an hourly basis.
   3. C.  Keep the employee at a salary, but pay overtime. The DOL has touted the fact that you do not need to change employees to an hourly status to comply with the final regulations. However, you must pay employees who do not meet the threshold 1-1/2 time their regular rate of pay for all hours over 40 in one week, even if you are paying them on a salary basis, and employers typically do not pay their salaried workforce (which generally is exempt) in this way. Such calculations of the regular rate of pay of a salaried employee must be made on a weekly basis, based on the hours worked, and overtime still needs to be paid. These salaried employees will need to keep careful track of their time, just like hourly employees. Thus, maintaining employees as salaried, but overtime eligible, generally is cumbersome and confusing.
   4. D.   Determine an hourly rate. Should the hourly rate be based on the employee’s annual wages divided by 2080 (if the employees works 40 hours per week)? Or do you want to look at the amount of overtime the employee historically has worked, to determine a new wage rate that, when paid at time and one-half for overtime, will equal what the employee currently is earning? When making such calculations, keep in mind that you cannot pay below minimum wage.
   5. E.   Change work duties to avoid overtime. You may decide to realign work duties or hire additional personnel in order to avoid overtime. You will need to analyze your current situation carefully, to see where duties can be reassigned, and whether hiring additional personnel makes fiscal sense.
3. Change policies as needed.  You should review current policies and practices and make changes where needed.  For example, employees who have been exempt may be used to consulting electronic devices on a regular basis when they are not at work, and employers often expect such responsiveness.  However, such activity, including checking emails and answering phone calls, is compensable time which could result in the need to pay overtime.
4. Train personnel.  Employees will have to be trained in order to ensure compliance.  Formerly salaried employees may balk at the need to keep track of their time.  They also may think it is appropriate to continue to use electronic devices after hours.  You will need to train them that these rules must be followed, or they will be disciplined.
5. Train supervisors.  You also will need to train supervisors so that they are aware of the new status, and the importance of ensuring that proper time is kept.  Supervisors must be cautioned that they cannot allow employees to work off the clock, or to pretend not to know that employees are working off the clock.  Noncomplying supervisors need to know that they will be subject to discipline for not enforcing the new requirements.

Failure to pay eligible employees overtime can result in big headaches and large bills if you are audited by the DOL.  Luckily, you still have time to prepare for the implementation of the final regulations on overtime exemptions.

If you have any questions or need additional information, please contact S. Whitney Rahman at (717) 509-7237 or at swr@blakingerthomas.com.

**This update is provided for informational purposes only and
should not be construed as legal advice or as creating an
attorney-client relationship where one does not already exist**