We’ve known for the past year that the Department of Labor (at President Obama’s direction) was looking at increasing the salary threshold for exempt employees. The final regulations were released today. Here are the high points:
- The new rules go into effect December 1, 2016.
- Any employees currently classified as exempt from overtime must make more than $913/week or $47,476 per year.
- The salary threshold will be increased every 3 years in order to keep pace with inflation. Until today’s final regulations, the salary threshold was $23,660 and hadn’t been increased since 2004.
- No change was made to the primary duties test (see more details below).
What should employers do now?
This is a great opportunity to review your entire compensation program to ensure your organization is in compliance, and make adjustments as necessary.
- Look at your employee population. Which employees are currently classified as exempt but make less than $913/week or $47,476 per year? Determine whether to give those employees raises or reclassify them as non-exempt, and make your transition plan including how to best communicate the change to the affected employees. In recalculating a comparable hourly rate, take into account the number of hours the employee normally works, including normal overtime. For more on moving exempt employees to non-exempt, click here.
- Review the job descriptions for your exempt positions. Do they accurately reflect the work done by the employees holding those positions? To be considered exempt, an executive, administrative or professional employee must satisfy three tests – 1) the salary level test (such as the $913/week amount mentioned above), 2) the salary basis test (an employee can expect a minimum amount of money for any work week in which he/she performs any work), and 3) a primary duties test:
Executive – must manage a company or recognized department and customarily and regularly direct two or more full-time employees or their equivalent. The manager must have authority to hire and fire or his/her opinion must be given particular weight in hiring and firing.
Administrative – office or non-manual work which is directly related to management or general business operations of the employer, a primary component of which involves the exercise of independent judgment and discretion about matters of significance.
Professional – the position requires advanced knowledge, predominantly intellectual in character and requires the consistent exercise of discretion and judgment, in a field of science or learning, customarily acquired by a prolonged course of specialized intellectual instruction.
It’s important to determine whether the positions your organization currently considers exempt truly meet all these tests. If not, consider how to make adjustments.
Not everyone is enamored with these new rules, and there is a movement in Congress to pass the Protecting Workplace and Advancement Opportunity Act (S. 2707 and H.R. 4773), which would nullify the new regulations. This Act would require the Department of Labor to analyze how changes to overtime rules would impact nonprofits, small businesses, and other vulnerable industry sectors before issuing a new rule. It’s unclear at this point how much traction this effort will have, so we recommend employers at least do the analysis and make a plan as if the regulations will take effect December 1.
We’ll provide more information between now and the December 1 deadline to assist you. If you have questions on how this may affect your business, please contact us.