Turns out there’s more to the FLSA’s overtime exemption rule changes (and salary threshold) than meets the eye. A former DOL administrator recently opened a lot of employers’ eyes with what she had to say about the new rule.
In front of a packed room filled with more than 1,000 HR professionals at the SHRM16 Annual Conference & Exposition, the former administrator of the DOL’s Wage and Hour Division, Tammy McCutchen, surprised a lot of attendees with her insights on the rule changes.
McCutchen was the main architect behind the 2004 changes to the FLSA’s overtime exemption rules. So she has a unique handle and perspective on how the new overtime rule will be enforced and how employers can go about complying with it. She’s now an employment law attorney with the firm Littler Mendelson, P.C. and counsels businesses on how they can comply with the FLSA.
In her presentation, she shared 11 critical tips about the law every employer should see:
1. Think $913, not $47,476
McCutchen said many employers are focusing on the $47,476 annual threshold under the FLSA’s salary basis test. But she warned not to do that.
Why? It’s a week-by-week test. Therefore, employers need to focus on making sure exempt employees are paid $913 per week.
If there are weeks that employees don’t make at least $913, the DOL will consider them non-exempt (or, rather, the DOL’s new favorite term: “overtime-eligible”) for those weeks.
2. Think $821.70 when adding in bonuses
There is an exception to the $913-per-week rule: it’s when employers will count nondiscretionary bonuses toward up to 10% of the threshold.
In that case, exempt employees must be paid at least $821.70 per week. Then, when a bonus is paid out (and they must be paid out at least quarterly), the employees’ pay for that quarter must average out to at least $913 per week.
3. Nearly every bonus is nondiscretionary
McCutchen said the DOL’s definition of nondiscretionary bonus is very, very broad.
As a result, she said just about every bonus employees receive will be nondiscretionary.
4. The bonus method is risky
McCutchen said she’s hesitant to advise employers to go with a strategy in which they’ll attempt make up any shortfall between the $821 figure and the $913 figure with a bonus.
Why? Because if an employee fails to earn the bonus, or the company makes a calculation or payroll error that results in an employee making less than $913 in any week within a quarter, the employee must be classified as OT-eligible for that entire quarter — and that can get very expensive very quickly.
As a result, she suggests just rolling bonus pay into an employees’ base salaries to get, and keep, them above the $913 threshold. Or, at the very least, she says employers must consult with outside legal counsel and present that counsel with a plan as to how they plan to make the bonus calculations/payments. Then, she implores employers to audit their bonus processes frequently.
Plus, she said, there’s the whole issue of what happens when an employee leaves in the middle of the quarter. In those causes, she said to play it safe and pay the person any bonus amount necessary to get them over $913 per week worked.
5. With highly compensated employees, don’t forget the last “4”
McCutchen said if an employee makes more than the new highly compensated employee salary threshold — $134,004 — chances are they’ll pass the minimal duties test thrown at them. But employers can’t forget the last “4” on that number.
She said she’s hearing the number “$134,000” tossed around a lot, and she warned that setting someone’s salary at $134K won’t make them a highly compensated employee under the rule.
6. Expect a big increase in three years
As you’ve likely heard, the salary basis threshold will be reset every three years.
Currently, it was set at the 40th percentile of earnings in the lowest wage census region — the South — and it will be reset to that figure every three years.
But McCutchen said the data set the DOL will be looking at three years from now will be much different than the data set it used to establish the $913 figure. Due to this year’s change to the FLSA, she said she expects a lot of the lower salaries to drop out of the data set over the next three years and to see a lot of the higher salaries climb.
As a result, she said the threshold will likely be much higher when the FLSA is updated again in January 2020.
She also reminded employers that they’ll get 150 days’ notice before the 2020 salary threshold kicks in.
7. Make the switch over Thanksgiving
As you know, the new salary threshold kicks in Dec. 1, 2016. Do you know what day that is?
It’s a Thursday, and because of that McCutchen said you don’t want to have employees’ new salaries or classifications kick in on that day.
Why? It’ll result in an administrative nightmare in which some employees will be exempt for half of the week and non-exempt the second half.
A better way: Make the change the week of Thanksgiving. She said due to the holiday, it’s unlikely newly OT-eligible employees will have to work overtime that week, which can make the transition a lot easier (without making it more expensive).
8. Remember state notice requirements
Some states require employers to provide workers with advance notice of changes in their pay, and employers can’t forget to abide by them.
McCutchen said such laws tend to require a one pay period heads up — and typically just for reductions in pay. Meanwhile, Missouri requires employers to give workers 30 days’ notice for pay reductions.
9. Meet the most stringent duties test
McCutchen pointed out that 18 states have duties requirements that differ from federal regulations.
Which ones are employers required to follow? Answer: An employer must follow the more difficult of either its state’s duties test or the federal duties test.
10. The rule changes aren’t going away
McCutchen said the chances are “slim to none” that the new exemption rule gets nixed or delayed prior to the effective date of Dec. 1.
11. There is a cost-neutral salary formula
One option employers are considering for affected employees who work 40-plus hours per week is dropping those employees’ base pay rates and then allowing those folks to make up for the shortfall by receiving overtime pay.
But some employers are struggling to determine what to reduce those employees’ base wages to.
So McCutchen shared a DOL-recommended formula for determining what an employee’s pay rate should be, so that when the person works overtime their total compensation isn’t more than what he or she’s currently taking home.
In other words, it’s a cost-neutral formula. But it’s really only cost-neutral if you have a good estimate of the person’s expected weekly hours (including overtime).
Here’s the formula: Weekly Salary/(40+(OT Hours x 1.5))
Here’s how it would work: Say you have an employee who works 45 hours every week with a weekly salary of $800. His hourly pay rate for the purposes of calculating overtime is $20 per hour ($800/40), so his OT-rate would be $30 per hour ($20 x 1.5). Now if this employee worked 45 hours per week, he’d make $950 per week ($800 + $30 x 5).
Now let’s use the cost-neutral formula for this same person working 45 hours per week. His base weekly pay rate would be dropped to $16.84 ($800/40+(5 x 1.5)). That would mean his OT-rate would be $25.26 ($16.84 x 1.5). So his weekly take-home pay for 45 hours’ worth of work is $800 ($16.84 x 40 + $25.26 x 5).
But McCutchen did admit this is a hard sell for this employee because it basically means a pay cut if he doesn’t get five hours of overtime each week.