Beginning on December 1, 2016, significant changes to federal overtime laws under the Fair Labor Standards Act (FLSA) will take effect. The most prominent of these changes is that the threshold salary for employees to be exempt from overtime will roughly double, from $23,660 ($455/wk) to $47,476 ($913/wk).

The good news for Green Industry businesses is that this change will only affect the relatively small number of companies with employees who previously qualified for overtime exemption but earn less than $47,476. The bad news is that the change comes at a time when a shortage of quality employees is already driving up costs for Green Industry employers. For those affected, the change will likely mean the need to alter compensation schemes or add employees to reduce hours.

Who is Overtime Exempt? Putting an employee on a salary does not automatically exempt that employee from being entitled to overtime. Instead, the employee’s job must meet certain criteria for that employee to be exempt from overtime. The most commonly found exemption for small businesses is based on a combination of the employee’s pay and the employee’s duties.

The first step in determining if the employee is exempt from overtime is termed the “salary basis test”. Under the current regulations, the employee must be paid at least $455.00 per week or $23,660.00 per year in order to be exempt from overtime. This is the major portion of the law that is changing on December 1, 2016. On that date, the employee must be paid at least $913.00 per week or $47,476.00 per year in order to be classified as exempt from overtime pay.

If the employee passes the salary basis test, then the employer must determine if the primary duties of the job fall within one of the exempt categories as specified above. The “executive” exemption is intended to exempt those employees whose primary duty is to oversee the work of others and manage a company or division of a company. To qualify, executives must oversee at least two full-time employees and have the authority to hire and fire employees or have his or her opinion regarding hiring, firing, and promotion given extra weight in making such decisions. As an example, a shop manager who oversees the employees who maintain trucks and equipment of a business may qualify for the exemption as long as their position is primarily non-manual. However, if that employee is also responsible for actually performing maintenance as his or her primary duties (e.g., performs oil changes and oversees others), then the employee does not qualify for the exemption and must be paid overtime. More information about the executive exemption is available here.

The “administrative” exemption applies to employees whose primary work duty is to perform (a) office or non-manual work that is (b) directly related to the management or general business operations of the employer or the employer’s customers, and (c) a primary component of which involves the exercise of independent judgment and discretion about (d) matters of significance, but doesn’t necessarily involve overseeing other workers. One example would be a buyer for a garden center who is responsible for determining what materials or products to purchase and in what quantities. Be advised that employees who perform mere clerical work not of direct significance to the operation of the company (e.g., receptionists, bookkeepers, and most machinery operators) do not qualify for the exemption.

The “learned professional” exemption generally applies to employees who have advanced degrees or training and perform intellectually-based work that requires consistent exercise of discretion and judgment. It’s generally geared towards professors and researchers, so it’s not commonly found among small businesses. You can learn more about the learned professional exemption here.

Employees who previously were exempt from overtime under the agricultural worker’s exemption will remain exempt and not be affected by the new changes to the law.

The Details: When calculating an employee’s salary under the new threshold, up to 10% can consist of “nondiscretionary” bonuses and commissions. Nondiscretionary bonuses can include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula. By contrast, discretionary bonuses are given by the employer outside of any contract or preannounced standards. An example would be an unannounced bonus or spontaneous reward for a specific act.

Options: For companies that have employees that will be affected by the new regulations, some options exist for compliance. The first option is strict compliance, which means continuing the employee’s current salary, but adding overtime when necessary. Depending on the employee’s work pattern, setting up a Fluctuating Work Week pay method may be a good way to keep the employee at a similar salary while reducing overtime costs in the heaviest work weeks. Other options include changing the employee to an hourly pay system that includes overtime, raising the employee’s salary to exceed the $47,476 ($913/wk) threshold, or shifting some of the employee’s workload to other employees or less-busy periods. Which option makes the most sense for your company depends on the specifics of your situation.

Timing: The new regulations take effect on December 1, 2016. That date falls on a Thursday, which means that employers will have to ensure that all of whatever pay period includes December 1st is compensated at a rate that complies with the new rules. For employees paid on a weekly basis, that will likely mean backdating the effect of the changes so that the entire week containing December 1.
Another important timing note is that the new threshold will increase over time, with the next increase coming in 2020. Increases will occur every three years thereafter and will be aimed at keeping the threshold at the at 40th percentile of weekly earnings of full-time salaried workers in lowest wage Census Region in the country.
The attorneys at Zlimen & McGuiness can help businesses answer questions about the new regulations and choose a compliance option that makes sense for them.

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