How to Give Your Employees a Raise Using the FLSA Overtime Rule Amendment

Whatever you might think of the current overtime wage rules in the Fair Labor Standards Act, their impact on the US employment market cannot be ignored. As the market changes, so do regulations. These changes to the policies set by the DOL affect millions of employees and employers nationwide, and ignoring them can get businesses into a lot of legal trouble. Maintaining compliance in an ever-changing market and legislative environment demands you stay alert and operationally agile.

The FLSA amendment of 2016, under the catchy and memorable title “Final Rule to Update the Regulations Defining and Delimiting the Exemption for Executive, Administrative, and Professional Employees”, refreshes the regulations and criteria for determining white-collar salaried employees exemption from the Fair Labor Standards Act’s minimum wage and overtime pay protections.

In essence, and this is where you want to lean in, the changes to the salary threshold for overtime exemption make it worth offering non-exempt employees a raise in their salary to cut overtime costs. However, only if you can prove the majority of their duties are “white-collar” because then the exemption threshold it’s just 47K a year.

Confused? Well, you’re not the only one. So let’s break it down to figure out exactly how you, as an employer, can stay compliant with the latest FLSA regulations, avoid overtime related lawsuits, keep your payroll cost-effective, while also giving your employees a raise.

What are the overtime pay requirements of the FLSA?

The FLSA sets the standards for minimum wage that employers must pay most of their employees, and it also sets guidelines for mandatory overtime pay:

An employer who requires or permits an employee to work overtime is generally required to pay the employee premium pay for such overtime work. Employees covered by the Fair Labor Standards Act (FLSA) must receive overtime pay for hours worked in excess of 40 in a workweek of at least one and one-half times their regular rates of pay. The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime hours are worked on such days. (Source: DOL)

Sounds pretty straightforward but now it gets a little trickier. Not all employees are covered by the FLSA overtime and minimum wage requirements. The FLSA allows for exceptions to the rule for certain employees who work in administrative, professional, executive, highly compensated, outside sales, and computer professional jobs.

To be classified as exempt, employees need to answer very specific criteria set by the DOL. This exemption from the FLSA is sometimes referred to as the “white collar” or “EAP” exemption:

Since 1940, the Department’s regulations have generally required each of three tests to be met for the FLSA’s EAP exemption to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”). (Source: DOL)

Parameters set for exempt employee classification tend to change from time to time through DOL rulings. The latest one is the Final Ruling in May 2016 that took effect on December 1, 2016.

What changed with the 2016 amendment to the FLSA overtime rule?

If you happened to click the above link to the Final Ruling document, you might be freaking out a little. More than eight-hundred pages of text in DOL legalese is enough to put anyone to sleep, or, if their job requires them to actually read the whole thing, give them an anxiety attack. However, this amendment focuses primarily on updating the pay and compensation levels needed for EAP workers to be classified as exempt from FLSA overtime pay requirement.

The DOL’s 2016 final rule increased to the minimum salary requirement for the administrative, professional, and executive exemption classification from $455 per week (or $47,476 annually) for a full-time position. For highly compensated employees the bar was raised too, from an annual salary of $100,000 to $134,004.

Everyone likes bonuses and incentive payments. With the DOL’s 2016 amendment, you will too. For the first time, FLSA regulations permit employers to use bonuses, commissions, and incentive payments to satisfy up to 10 percent of the minimum salary requirement for the administrative, professional, and executive exemptions.

It’s important to note that non-discretionary bonuses are generally defined as bonuses promised or agreed on in advance. Surprises don’t count. In addition, these payments can only be included if they are paid at least quarterly.

As of January 1st 2020, the DOL will publish adjustments to the salary requirements for exempt employee classification. These updates will be published every 3 years and should not surprise employers and bookkeepers because all updated rates will be published in the Federal Register and the Wage and Hour Division’s website at least 150 days before their effective date. This gives you plenty of time to prepare.

Complying with FLSA overtime regulations today

With the salary threshold adjustments of the DOL’s final rule in 2016 coming into effect, millions of American workers crossed the line between exempt and nonexempt employee classification. To remain compliant employers must ensure proper employee classification at all times. All employers are required to maintain accurate time tracking and record integrity to keep payroll cost-effective.

Properly classifying (and re-classifying) your employees according to the latest FLSA guidelines is the first step to overtime regulation compliance. You should check your employee classifications regularly, and not wait for regulatory updates. Employee exemption status can change not only as a result of salary threshold adjustments (due to occur every 3 years as of January 1st 2020), but also other circumstances such as organizational changes.

For example, an employee that no longer performs duties included in the exemption criteria or earns less than $913 per week, should be immediately reclassified as non-exempt, to be paid overtime in accordance with DOL regulations.

A change in an employee’s classification, like the one in the example above, can become pricey for the employer. There’s no way to get around the duties test in determining exemption but it’s possible to lower expenses by boosting the salary of an employee to make them eligible for exemption. So it’s worth comparing the costs of raising the base pay for exempt employees with the option to reclassify them as non-exempt and pay them for overtime according to FLSA requirements.

For example, an employee whose salary is significantly lower than $913 a week and rarely works overtime is better classified as non-exempt regardless of his or her role in the organization. However, for an employee whose salary is close to the same weekly sum, and they tend to work more than 40 hours a week on a regular basis, it might be more cost-effective to raise their salary to maintain their exemption status.

The accuracy and integrity of the data used for payroll are crucial for compliance with DOL regulations regardless of overtime payments and policies. Moreover, historical attendance records can help you pinpoint the employees whose classification might change under the new FLSA so you can take action before it costs you.

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Avoiding overtime wage lawsuits and DOL audits

With the new rules in effect, small businesses with outdated employee classifications are bound to be easy prey for DOL audits. But that’s not the only reason to ensure your business attendance management is compliant with FLSA requirements.

Considering that 42% of wage and hour court cases are related to overtime, and since you want to avoid being dragged to court, it makes simple sense to keep accurate track of overtime in accordance with regulations. However, keeping track of OT can be tricky when an employee classification changes to non-exempt while you continue to pay them as exempt. Both the DOL and abovementioned employee can end up costing you more than just your reputation as an employer.

You don’t want to leave the discovery of employee misclassification to the DOL or the employee. You want to have good payroll software that helps you stay on top of change as they take place so you can take action. Self-auditing is a good start for very small businesses, while SMBs often choose external service providers to run the audits regularly.

If you listen to GI Joe, and you should always listen to GI Joe, knowledge is half the battle. It’s true in this case as well. Keeping your employees informed and educated on company overtime policies and changes in their exemption status is the only way to ensure your employees are aboard with compliance and productivity.

Giving your employees important corporate knowledge, like teleworking policies, or employee handbooks, can save you on payroll, and prevent those unwanted lawsuits after the fact.

The future is now, and technology is here to turn compliance and cost-efficiency from a pain in the but to something you’re do very well.

Mobile time tracking apps offer features such as overtime alerts in real time sent to both the employee and the manager’s mobile phones. Document sharing apps put overtime policies in the palms of your employees’ hands so no one can claim to have never received it, especially when changes are made.

But for total, effortless compliance, a time-tracking app that seamlessly integrates into your payroll solution is the quickest and easiest way.

State of the law

At this time, the FLSA overtime changes of 2016 are frozen in legal limbo courtesy of a Texas judge who ruled that the Final Rule’s salary level exceeded the Department’s authority, and concluded that the Final Rule is invalid. The latest press release from the DOL states that:

On August 31, 2017, U.S. District Court Judge Amos Mazzant granted summary judgment against the Department of Labor in consolidated cases challenging the Overtime Final Rule. The court held that the Final Rule’s salary level exceeded the Department’s authority, and concluded that the Final Rule is invalid. In October 2017, the Labor Department launched an appeal against the judge’s decision. Once this appeal is docketed, the Department of Justice will file a motion with the Fifth Circuit to hold the appeal in abeyance while the Department of Labor reevaluates the salary level for exemption.

To make things even more complicated, you have to consider state laws that may have different overtime rules demanding higher or lower salary level for overtime wage exemption. Good examples are California and American Samoa.

You want to be a law-abiding employer and avoid those dreaded DOL audits and overtime lawsuits. But state legislators and federal agencies are not about to make it easy for you, so you have little choice but to pay attention and execute payroll adjustments before trouble comes knocking.

Keep in mind, that whatever changes are implemented to FLSA overtime – you will always need to keep accurate track of employee exemption statuses and overtime situation. Being on top of exemptions to the FLSA will likely save you money while, at the same time, allow you to give your employees raises. Finally, keeping track of exemption statuses will help you avoid costly litigation so remember to keep your eye on the FLSA prize.