By now, employers know that the U.S. Department of Labor is raising the salary level for exempt employees under the Fair Labor Standards Act (“FLSA”). The new rule takes effect December 1, 2016, and raises the minimum annual salary level from $23,660 to $47,476 to qualify for the exemption. Failing to raise salaries to this new level, without taking any other action, will result in the formerly exempt employee being entitled to overtime compensation. However, you may not know that employers have several options for complying with this new rule beyond raising salaries.
One option employers may pursue is adjusting an employee’s compensation to an hourly wage, and setting this wage at a rate where the hourly wage, plus anticipated overtime, comes out to an amount equal to the employee’s current salary.
For example, an employee who currently works 45 hours weekly and receives $30,000 annually, or about $577 weekly, would no longer satisfy the salary requirement to be exempt from overtime under the new rule. Rather than raising this salary to $47,476, the employer could pay this employee an hourly rate of $12.20. This works out to about the same compensation as the employee currently receives, and the employer is in compliance with the new rule:
40 hours x $12.20 (regular hourly rate) + 5 overtime hours x $18.30 (1.5 x $12.20) = $579.50 weekly compensation, or $30,134 annual compensation.
You could still denominate an employee who earns less than the exempt threshold as being salaried, as long as he or she is paid time and half for any overtime hours worked. In the above example, an employee currently receiving a weekly salary of $577 for working an average of 45 hours a week could now receive a weekly salary of $488 for 40 hours worked, with the employer paying overtime for the 5 additional hours. This would result in the employee receiving about the same weekly compensation, and the employee continues to be paid on a salary basis.
Alternatively, an employer may review an employee’s workload and determine that he or she does not actually need to work more than 40 hours per week. If an employee works 40 hours a week or less, he or she does not need to receive overtime, but may still be paid on a salary basis. Or, if an employee regularly works outside of his or her regular work time, employers might consider changing the employee’s regular hours to better reflect when the employee performs work duties to stay at or below 40 hours per week.
Although the Department of Labor does not mandate the use of a time clock to keep track of employee time, it is important that employers and employees agree on a regular schedule and keep track of time that an employee works outside of his or her normal hours. This will ensure that regardless of the option employers use to comply with the new rule, employees are paid the overtime compensation to which they are entitled and employers avoid the penalties for noncompliance under the FLSA. For more information on how to comply with this new rule please contact the attorneys at Nauman Smith.