Share this article! Most employers have both hourly and salaried employees. The salaried employees are either exempt from overtime because of the duties they perform, or non-exempt and entitled to overtime if they work more than 40 hours per week. It is anticipated that in July 2016, the Department of Labor will issue new regulations … Read more
Most employers have both hourly and salaried employees. The salaried employees are either exempt from overtime because of the duties they perform, or non-exempt and entitled to overtime if they work more than 40 hours per week. It is anticipated that in July 2016, the Department of Labor will issue new regulations that substantially increase the salary threshold for employees who are classified as exempt from overtime because they are executive or administrative employees. The proposed increase will raise the minimum salary from $455.00 per week to $970.00 per week. This means that once the new regulations are introduced, an employee who performs the duties of an executive or administrative employee must be paid a minimum annual salary of at least $50,440.00 to be exempt from overtime. The new regulations will also include annual increases to the salary minimum.
Generally, non-exempt employees (or hourly employees) are entitled to be paid overtime if they work more than 40 hours per week. Employees who are employed in “a bona fide executive, administrative, or professional capacity” are exempt from overtime, provided they are paid on a salaried basis. To be exempt from overtime, the employees must perform certain duties to qualify as executive, administrative, or professional employees and be paid the same salary every week regardless of how many hours they work (with a few exceptions).
Under federal law, the duties that an employee must perform to qualify as an administrative employee include:
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 (i.e., the employee must perform work directly related to assisting with the running or servicing of the business); and
The exercise of discretion and independent judgment with respect to matters of significance.
To qualify as an exempt executive employee:
An employee’s primary duty must be managing a business, or a department or subdivision of the business;
The employee must customarily and regularly direct the work of at least two or more employees; and
The employee must have the authority to hire or fire other employees, or the employee’s recommendations with respect to hiring, firing, advancement, or promotion of other employees must be given particular weight.
To qualify as an exempt learned professional:
• An employee’s primary duty must be the performance of work requiring advanced knowledge in the field of science or learning acquired by a prolonged course of specialized intellectual instruction.
If your company has employees who are currently classified as exempt because the duties they perform meet the criteria for administrative or executive employees, you need to consider whether to increase their salaries to meet the $970.00 weekly threshold, or reclassify the employees as non-exempt and pay the employees overtime (if earned). Among the factors to consider when making this decision is how many hours per week you think your exempt employees are working. If your exempt employees rarely work more than 40 hours per week, then reclassifying these employees as non-exempt should not have a significant economic impact on your business. However, if your current exempt employees typically work more than 40 hours per week, you will have to do some math to calculate your potential exposure for overtime and compare that exposure to the increased salary you will have to pay to keep the employees exempt. The comparison might result in a decision to reclassify some or all of your exempt employees, or to hire additional hourly employees and schedule shifts to avoid paying overtime.
For positions that you decide to reclassify as non-exempt, you should also consider:
• Whether to switch the employees to an hourly wage as opposed to paying the non-exempt employees a salary;
• How non-exempt employees who continue to be paid a salary are going to keep track of the hours they work so you can make sure they are paid properly;
• Whether your payroll system is set up so you can calculate a regular rate of pay based on the non-exempt employees’ salaries and pay overtime based on that regular rate of pay;
• What kind of incentives or programs, if any, you want to introduce to retain management employees who become non-exempt; and
• Adopting a policy that prohibits non-exempt employees from working overtime without advance permission and imposes discipline for employees who work unauthorized overtime.
There is no “right” answer for whether a particular employee should be reclassified. The decision should be based on the economics of your business and whether, based on the duties the employee actually performs, the employee should have been classified as exempt at the outset.
Elizabeth A. Semler is a partner in our Litigation Group and Chair of our Employment Law Group. She can be reached at [email protected] or 503.227.1111.
