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Jul 6, 201608:00 AMThe Bottom Line

with contributors from Associated Bank

Why the final changes to wage and hour law may have you crying 'uncle'

(page 1 of 2)

After much anticipation and speculation, the final regulations changing the salary basis test for determining exemption status have arrived. Among other changes, the final regulations have more than doubled the amount that employees must minimally be paid in order to be considered exempt.

This is no small matter, as it is anticipated that millions of currently exempt employees will be affected.

What does it mean to be exempt?

The Fair Labor Standards Act (FLSA) requires that all nonexempt employees be paid overtime, receive at least minimum wage, and have their work hours accurately tracked. However, the Department of Labor (DOL) created some categories of “exempt” employees for whom those obligations do not apply.

Many employers are surprised to learn that it’s not easy to be exempt. In order to be properly classified as exempt, employees must pass both of the following tests:

  1. The salary basis test
  2. The primary duties test (there are also some limited industry-specific exemptions)

The primary duties test requires that the job’s essential functions fall within one of the recognized white collar exemptions: executive, administrative, professional, computer professionals, or outside sales. Although the DOL has decided not to make any changes to the primary duties test at this time, it has indicated its desire to revisit this test in the future with an eye toward making it more difficult to pass.

The salary basis test currently requires that exempt employees be paid a regular salary of at least $455 per week, which is the equivalent of $23,660 per year. Failing either test means the position isn’t exempt.

The final regulations

Despite the significant impact the final regulations are likely to have on most employers, the actual changes themselves are quite simple:

  1. The salary threshold moves from $455 per week ($23,660 per year) up to $913 per week ($47,476 per year). The new salary threshold applies to any exempt employee, even if he/she is a “part-time exempt” employee.
  2. Up to 10% of the salary can be paid via nondiscretionary bonuses, commissions, or incentive pay (more on this below).
  3. An inflationary adjustment will be applied to the new salary threshold every three years.
  4. The annual salary requirement for the “highly compensated” employee exemption (which applies to certain positions that don’t fall into one of the white collar exemptions) moves from $100,000 per year to $134,004 per year.

Regarding the inclusion of bonuses, commissions, or incentive pay in the salary basis calculation, this option may not be of much practical use to employers since it is subject to a number of limiting conditions. First, it is confined to only 10% of the salary basis calculation, which means that, on average, a maximum of $91.30 per week can be paid via this method.

Second, the bonuses must be paid out at least once every quarter, and the amount of the bonus must bring the average wages in every week within the period the bonus is intended to cover (e.g., quarter, month, etc.) up to at least $913/week.

Third, the bonuses have to be non-discretionary, which means that they should be part of a formal bonus, commission, or incentive pay plan that is designed to accomplish some sort of business-related goal (e.g., a safety/attendance bonus, hitting a sales target, etc.). In other words, you can’t choose to pay employees a straight salary that is below the minimum threshold, and then wait until the end of the quarter to see if you have funds available to pay a “bonus” and retroactively increase their pay to bring it above the $913/week threshold.

Although the regulations are final now, employers have a little bit of breathing room, as the regulations will not go into effect until Dec. 1, 2016. However, that’s not much time and you must start planning now.

Start with an audit

Before implementing a solution, you need to understand the scope of your potential problem, which should start with conducting a thorough audit of all of the positions you currently have classified as exempt. Don’t ignore this step, since even if the regulations hadn’t changed at all many employers have at least one position that they currently misclassify as exempt that really should be nonexempt.

In conducting an audit the first question should not be whether you are paying enough salary, but whether the position can actually pass one of the primary duties tests. For the most part the primary duties tests were not meant to be easy to achieve, and it is this step of the two-part test that people most commonly get wrong.

For those positions that pass the primary duties test, you should next look at how much each is being paid. If they’re already being paid at a rate that exceeds the new threshold, then you have nothing to worry about (although you should revisit your compensation at least every three years in light of the new inflationary adjustor).

For those positions that are currently being paid beneath the threshold, you have several compliance options.

(Continued)

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