Time to Assess Classification of Exempt Employees

The status of many exempt employees will change to non-exempt as of December 1, 2016 under revised Fair Labor Standards Act (“FLSA”) regulations, unless action is taken to maintain their exempt classification. Now is the time for employers to assess the classification of their employees and adjust their salaries as necessary to remain compliant under the FLSA regulations.

Under the FLSA, employees are entitled to overtime pay for work in excess of 40 hours in a workweek at a rate of 1.5 times their regular rate of pay (“non-exempt employees”), unless otherwise exempted by the statute (“exempt employees”). Certain exemptions under the FLSA, such as the executive, administrative, professional, computer employees, and highly compensated employees exemptions, require that (1) the employee works on a salary basis, (2) the employee’s salary meets a minimum threshold, and (3) the employee’s job responsibilities include certain duties.

The revised regulations double the minimum salary threshold for the executive, administrative, and professional exemptions from $455 per week to $913 per week. The revised regulations also change the minimum salary threshold for the highly compensated employees exemption from $100,000 in total annual compensation (which must include at least $455 per week) to $134,004 in total annual compensation (which must include at least $913 per week).

This means that, effective December 1, 2016, many employees whose status was previously exempt will now become non-exempt because their salaries do not meet the $913 threshold (or the $134,004 threshold where applicable), even though their job duties remain the same. As a result, in the absence of any changes to their compensation, these employees will need to receive overtime pay for hours they work in each week that are above 40 hours.

However, the revised regulations permit employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the $913 threshold so long as they are paid on a quarterly or more frequent basis, whereas previously such bonuses and payments could not be used to satisfy the $455 threshold.

Employers should bear in mind that under the revised regulations, the salary threshold will be updated every three years, beginning on January 1, 2020.

Employers should take the following steps before December 1, 2016 to remain compliant with the FLSA:

  • Determine which exempt employees, if any, will become non-exempt as a result of the higher salary threshold under the new regulations.
  • Decide whether to increase the employee’s salary to maintain his/her exempt status or to pay overtime based on the new non-exempt status and adjust the compensation accordingly.
  • Review your timekeeping policy and time-tracking system to ensure they are compliant with applicable law.
  • Review your paid time off policy and all other policies that differentiate between exempt and non-exempt employees and determine whether they require adjustments.
  • Communicate to employees their change in status and/or compensation, including training newly non-exempt employees in your timekeeping policy and time-tracking system.

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