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May 31, 201612:24 PMLaw at Work

with Jessica M. Kramer

Will you have to start paying your salaried employee $47,500 a year?

Raise your hand if you thought that paying your employee a salary over the minimum salary level (currently $23,660 a year, or $455 a week) made the employee exempt from (or not eligible for) overtime? Be honest. There are many of you out there.

And I don’t blame you. This is a confusing area of the law. You are a good employer trying to do the right thing. But in actuality, paying your employee a salary over the minimum salary level does not make the employee exempt from (or not eligible for) overtime. Or, not necessarily.

Salary level has never actually been the sole determiner of whether an employee must be paid overtime. But now the difference in those who must be paid overtime and those who are not required to be paid overtime will be clearer in the eyes of the average employer. Or so the Department of Labor hopes.

It has been about a year since the buzz first began that the minimum salary that employers have to pay employees they want to classify as “exempt” would more than double. Now, as of May 18, 2016, this change is officially lined up to take place, and the minimum annual salary for exempt employees will be $47,476; the change will take effect Dec. 1, 2016.

Does this affect you? Well, are you an employer? Then it likely does, or could.

Another misconception is that only large employers are subject to certain federal employment laws. That may be true in the case of, for example, the Family and Medical Leave Act. However, in this case employers who have one or more employees and are subject to the Fair Labor Standards Act (FLSA) — virtually all employers — must be prepared to comply with the changes prior to Dec. 1.

What does this mean? Does every employee who is paid a salary have to be paid over this amount? Not necessarily. It applies to employees who are both “exempt” and salaried. First, let’s break down what “exempt” even means.

Under the FLSA, there are two categories of employees: exempt or nonexempt. “Exempt” means that the employee is classified as exempt from the overtime requirements of the FLSA. In short, exempt employees do not have to be paid overtime pay no matter how many hours they work, whereas non-exempt employees must be paid time and one-half for all hours worked over 40 in any given week, unless there is a state law that requires something more favorable to the employee (e.g., some states require overtime pay for any hours worked over eight in a day, regardless of the weekly total; Wisconsin does not).

What actually makes an employee exempt? The employee’s duties (as well as the salary) make an employee exempt. This is part of the law that has not changed; however, many employers didn’t fully understand it in the first place. The FLSA sets forth several categories of employees who qualify for overtime exemption, based on the type of job and the duties associated with the job. There are six categories: Executive, Administrative, Learned Professional, Computer-Related, Outside Sales, and Highly Compensated. However, do not — I repeat — do not let the titles of the categories alone be your guide. Recently, a very large employer in the technology industry found itself in a giant lawsuit based on alleged abuse of the “Computer” category. I provide these category titles only as a small bit of insight into the fact that there are actually a variety of types of jobs that can qualify under the duties test as exempt. An in-depth analysis of each employee and his or her job duties is the best way to ensure you are properly classifying the employee as exempt or nonexempt.

It all may boil down to this: are you misclassifying one or more employees as exempt, when they never should have been exempt, regardless of the salary level? Indeed, that is one aspect of all of this that the Department of Labor expects to be brought to the surface for hundreds of thousands of workers, and maybe more. It may be the employee’s duties more so than the compensation that you need to closely review. 

Let’s say you know that your employee qualifies under the duties test to be exempt, and you are paying that employee less than a salary of $47,476. It’s probably time to review the situation and consider your options.

For employers out there who pay your otherwise-exempt (under the duties test) employee, say, $44,000 a year and aren’t ready to hike the base salary that much, the new law will allow non-discretionary bonuses and incentive pay to be part of the total compensation calculation for the purposes of meeting the minimum threshold. However, there are restrictions on this and criteria that must be met that are beyond the scope of this article. But consider this a small ray of sunshine in what you may feel is an otherwise ominous-looking forecast.

As with every law there are exceptions. The summary in this article should not serve as the basis from which you make changes to the way you are paying, classifying, or scheduling employees. It is possible that you think this applies to your employee, you make a bunch of changes, and it turns out that you could have benefitted from an exception all along. Employment laws are complex. Any employer who thinks it may need to make some adjustments based upon this impending change in the law is urged to seek the advice of a knowledgeable employment attorney in the very near future. Dec.1 will creep up on us all very quickly.

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May 31, 2016 03:51 pm
 Posted by  Anonymous

This is far more complicated than the article even begins to touch on as I have been researching its impact on child care/early childhood education for the past week or so. First there is the half million in gross business activity test (which is defined differently for for-profit and non-profit programs).Businesses and non-profits with less than a half million in sales/business activity seem to be exempt from the rules. Second there are categories - teachers ,lawyers , doctors that are defined exempt no matter what salary is involved. With teachers it is very complicated partially because the definition of what is an educational institution can vary. Federal regs say preschools can be an educational institution and persons mainly involved in teaching are exempt but local interpretations of Wisconsin law state that preschools etc. here are not educational institutions. Either way the overwhelming majority of workers in early childhood programs who were exempt under the old salary cap will no longer be exempt December 1st. There is no sense yet of what the impact will be but the changeover happens to occur at the same time of a major shift in how payment are made under the state child care subsidy program. There may be rocky times ahead if you are hiring new staff in 2017 and they need child care (about half the empty slots currently in Dane county child care programs are due to an inability to hire teachers) One interesting off shoot of this is that low wage businesses with over time options may be more competitive in a very tight job market- something not often discussed in regards to this issue- though many businesses like child care will find themselves squeezed between what markets will pay for services and what they need to pay for staff.

May 31, 2016 07:14 pm
 Posted by  Anonymous

Well, it will be interesting to see how many nonexempt employees will claim that they are improperly classified as nonexempt (the reverse of the normal situation), because they can nearly double their pay by doing so.

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