The New Department of Labor Overtime Rules for Exempt Employees

Thom K. Cope

Get ready! On December 1, 2016, the Department of Labor (DOL) will implement the new rules on exemptions from overtime for currently exempt employees.

The Basics

There are three “main” exemptions (aka “white collar workers”): Professional, Executive and Administrative. In order for employees in these classifications to be exempt from overtime pay (1.5 times the hourly rate for every hour in excess of 40 hours per week worked), they must meet three tests:

Salary basis: Employee is paid a predetermined guaranteed fixed salary per week
Salary level: Currently at least $23,600
Duties test

So if the employee meets the salary tests, we then look to the “duties” of that person to determine if what they actually do meets the federal law.

The duties tests for the main three exemptions are:

Executive Exemption:

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.

Professional:

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
The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Administrative Exemption

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.

New Rules

The new rules do not change the salary basis or duties tests. The only thing that changes is the move from $23,600/year ($455/week) to $47,892/year ($921/week). This will be adjusted annually to the 40^th percentile of weekly earnings for all U.S. full-time salaried workers. So the threshold could change for 2018 (up or down). THIS MEANS THAT UNLESS THE NEW SALARY IS MET: EMPLOYEES ARE NON-EXEMPT—AND MUST BE PAID OVERTIME FOR ALL HOURS WORKED IN EXCESS OF 40 HOURS PER WEEK
Highly Compensated Employees: The law also allows exception from overtime for “highly compensated” employees. Currently that is defined as employees making $100,000 or more per year. After December 1, 2016, that threshold is going to be 90% of full-time salaried workers’ pay, which will be $122,148/yr. Any employee making this much money is not eligible for overtime, regardless of their duties.

Strategies

There are various strategies you may use. The first is obvious. Never let any employee work over 40 hours in one week. Second, if an employee is close to the magic number (i.e. a manager making $45,000/year), you may want to consider bumping them up to the $48,000/year level and you would owe no overtime. Third, you could hire part-time employees to do the work of one full-time employee.

What you cannot do is lower the pay, trying to factor in anticipated overtime to equal the employee’s current pay.

We recommend to our clients that it is imperative to have and ENFORCE a “no overtime policy” unless a supervisor approves it in advance. As business partners with our clients, we understand you may have slim profit margins. That is why it is so important to have a strategy in mind before the effective date.

Please contact us if you have any questions.