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What You Should Be Doing Now to Prepare for New Exempt Employee Rules

The Department of Labor is in the process of revising the salary threshold for determining whether a worker is exempt from overtime pay. This threshold is currently $23,660 ($455/week), but a new level of $50,400 (about $970/week) has been proposed, which is the 40th percentile of earnings for full time salaried workers. That means that any employee who makes less than $50,400 would be eligible to receive overtime pay, with a few exceptions for certain types of professional positions.

In 2014, President Obama signed a Presidential Memorandum directing the Department of Labor (DOL) to modernize and simplify the current overtime regulations. The DOL requested comments, which are now being reviewed, and it’s expected that final regulations could be released in July or even sooner.

The huge jump in the exempt employee salary threshold comes about because the last time these were updated was 2004, so part of the proposed regulations will include an annual update to ensure the amounts keep pace with inflation.

Generally, hourly workers are eligible for overtime pay at one and a half times their normal hourly rate for any hours worked in excess of 40 per week. Some states and localities require a higher rate. It’s estimated that this new ruling will affect nearly 5 million workers currently exempt from overtime.

What actions should employers take now?

Do the analysis: Take a look at your current employee list to determine whether you have employees exempt from overtime whose annual salary is less than $50,400 (if you’re a Mize Houser payroll client, run a User Defined Employee List and pick Employee Name and Pay Rate with a status of Active).

Look at 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 $970/week proposed 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.

We don’t know when this pending legislation will take effect, but it’s likely businesses will only have 60-90 days in which to make changes in order to comply. So do what you can now to prepare!  Contact us if you have any questions.