Wage and hour issues can cause a variety of headaches for companies. In 2017, there were 8,261 Fair Labor Standards Act (FLSA) lawsuits filed against companies, which is 417 percent more than in 1997. The Wage and Hour Division of the Department of Labor has recovered $2.8 billion from companies since 1984 with 70% of the money coming from FLSA violations that collectively affected 3 million workers. Failing to properly pay overtime accounts for a large portion of these fines.
A side note here for all of you looking forward to a new year- “New year, new you” is now “New Year, New overtime salary threshold”. So let’s prepare together to ensure you aren’t one of the people who are ill prepared when it comes to overtime pay.
The New Overtime Rules
Many companies believe that one only needs to pay a salary for an employee to be exempt from overtime. This is 100% false! And yet it is extremely common for both employers and employees to believe.
As a reminder, the new overtime rules become effective on January 1, 2020. Currently the minimum salary that an employer must pay for an individual to be exempt from overtime is $455 per week (which equals $23,660 annually). The new overtime salary threshold will be $684 per week (which equals $35,568 per year). The new rule also raises the threshold for the highly compensated category from the current threshold of $100,000 to $107,432 per year. The new rule will also permit employers to use nondiscretionary bonuses and commissions that are paid on at least an annual basis within this count towards meeting the overtime salary threshold (but only up to 10%) of the salary level.
Employers that are not paying at least $684 per week as a salary for any currently salaried exempt employees need to convert the employees to hourly employees or ensure that these employees do not work more than 40 hours in a week (which is when overtime begins under the FLSA).
Duties Tests
As I said earlier, improper classification of employees as “exempt from overtime” can result in big fines, and with the common (false) belief that someone only has to be salaried to be exempt, this happens quite frequently. To prevent those fines, employers must pay attention to the overtime exemptions. Here is a quick overview:
Executive
To qualify for the executive employee exemption, all of the following tests must be met as noted by the Department of Labor:
• The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $684* per week;
• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
“Primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.
Common job examples of the exemption are managers, CEO’s, supervisors, and business managers.
Professional
To qualify for the learned professional employee exemption, all of the following tests must be met as explained by the DOL:
• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684* per week;
• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
• The advanced knowledge must be in a field of science or learning; and [t]he advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Administrative
To qualify for the administrative employee exemption, the DOL requires that all of the following tests must be met:
• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684* per week;
• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
HR Generalist, Internal Auditor, Budget Analysts, and Buyers are the typical positions that qualify for this exemption.
Computer Employee
To qualify for the computer employee exemption, the following tests must be met as explained by the DOL:
• The employee must be compensated either on a salary or fee basis at a rate not less than $684* per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;
• The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;
• The employee’s primary duty must consist of:
1. The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; and
2. The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
4. A combination of the aforementioned duties, the performance of which requires the same level of skills.
Outside Sales
To qualify for the outside sales employee exemption, all of the following tests must be met as noted by the DOL:
• The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
• The employee must be customarily and regularly engaged away from the employer’s place or places of business. The salary requirements of the regulation do not apply to the outside sales exemption.
The most important thing to pay attention to regarding the outside sales exemption is that the person must be truly located outside of the office.
Highly Compensated Employees
The regulations contain a special rule for “highly compensated” employees who are paid a total annual compensation of $107,432 or more. The Department of Labor explains what a worker must be do to be a highly compensated employee:
A highly compensated employee is deemed exempt under Section 13(a)(1) if:
1. The employee earns total annual compensation of $107,432 or more, which includes at least $684* per week paid on a salary or fee basis;
2. The employee’s primary duty includes performing office or non-manual work; and
3. The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
Misclassification and Common Overtime Mistakes
Improperly classifying an employee as exempt from overtime can result in hefty penalties for a company and is not something that any company should do willingly.
There are a few common ways that many companies mess up the overtime exemptions:
- The employee is actually paid an hourly wage rather than being paid a salary. Rule 1 is that these employees must be paid a salary for them to be exempt from overtime unless they are a computer professional.
- The employee failed to perform the required duties that are necessary to meet the qualification even though they had the right title. For example, the employee was labeled a manager, but really was just a glorified cashier.
- The company failed to consider the requirements at the state level, which may have a different salary threshold. Alaska, California California, and New York have salary thresholds that are higher than the new threshold that will go into effect in January. Pennsylvania’s salary threshold to be exempt from overtime will be above the federal threshold beginning in 2021. Washington state also has a proposed rule that would increase the overtime threshold for workers in the state.
With the new regulations coming it may be time to review your classifications to ensure that they are properly done.
Pay Deductions for a Salary Exempt Employee
You can make deductions from the pay of a salaried exempt employee under certain circumstances as noted by the Department of Labor:
Deductions from pay are permissible when an exempt employee:
is absent from work for one or more full days for personal reasons other than sickness or disability;
for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness;
to offset amounts employees receive as jury or witness fees, or for military pay;
for penalties imposed in good faith for infractions of safety rules of major significance;
or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions.
Also, an employer is not required to pay the full salary in the initial or terminal week of employment [(if the employee did not work a full week)], or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.
Practical Steps to Reduce and Manage Overtime
Managing overtime can be one of the trickiest tasks for HR to do. Fortunately, there are some ways that employers can manage overtime.
- Track hours- count the hours that people work through software or a timekeeping device. If a person is working less than 40 hours a week, then you can pay them a salary and not worry about whether or not they are exempt from overtime.
- Have policies- Make sure that you have a policy that requires employees to report off-the-clock work. Inform employees of the policy and make them sign an acknowledgement. You still must pay employees if they perform unauthorized work off-the-clock, but you can discipline them for not getting approval for the time first or working without authorization.
- Pay attention to the job descriptions: I wrote about this last week. You need to make sure that the job duties of the employee match the requirements of the overtime exemptions.
- Train supervisors to be aware of these issues. Make sure that supervisors know what jobs and duties people are supposed to have and ensure that they assign tasks to exempt employees that are within their job duties and the above overtime exemptions. They should also be aware if any employees are nonexempt so that they can monitor their hours to reduce the amount of overtime.
Conclusion
The new regulations are sure to bring a number of changes to many companies. Companies may need to redistribute work and convert salaried employees to hourly employees in an effort to avoid paying overtime to employees that were formerly exempt from overtime. The right time to act is now before the regulations go into effect to ensure timely compliance.
The information provided in this blog is for educational purposes only and is not legal advice. If you need legal advice, then you should speak with a lawyer about your specific issues. Every legal issue is unique. A lawyer can help you with your situation. Reading the blog, contacting me through the site, emailing me or commenting on a post does not create an attorney-client relationship between any reader and me.
The information provided is my own and does not reflect the opinion of my firm or anyone else.