Hourly or salaried. Base salary versus incentive pay. Job titles and job duties. Overtime laws can be tricky waters to navigate.
Imagine it’s Friday night, just two days away for your company’s new product launch. You’re almost there, but there’s still a lot of work to be done with no budget left. Good thing your team is salaried so you can ask them to stay late without having to worry about paying overtime. Or can you?
Many employers assume that just because an employee is salaried, it means he or she is exempt from overtime laws. But there’s more to it than how an employee is paid. In fact, overtime laws, when interpreted conservatively, exempt fewer people than it might seem from overtime pay.
What are overtime laws?
In 1938, the federal government passed the Fair Labor Standards Act (FLSA), which among other things, laid the foundation for overtime laws that dictate when an employee must be compensated for time worked over forty hours per week. And just recently, on May 18, 2016, FLSA was updated with the Final Rule that increased overtime eligibility for millions of Americans, putting an even greater burden on employers to review and revamp their pay practices to ensure they remain in compliance.
So who qualifies as exempt and nonexempt under the FLSA overtime laws? The answer isn’t always straightforward. While some of the guidelines are fairly black and white, the trickiest ones cover nearly every shade of gray. Let’s take a look at the criteria, starting with the simplest and moving through the most complex.
Salary Level Test
This one is a no-brainer. The current rule states that any employee making $23,600 per year ($455 per week) is exempt from FLSA overtime laws. Generally, this is the easiest test to evaluate for each employee and rarely provokes controversy.
Salary Basis Test
If an employee can count on receiving any portion of his or her base pay on a regular basis, regardless of whether the employee works the same number of hours each day, the employee is considered a salary basis employee under FLSA overtime laws. When someone is paid a salary of $50,000 per year for example, they’ve clearly passed the salary basis test.
However, some employees are listed as hourly in payroll systems and on offer letters, but they do in fact receive a guaranteed amount of pay each week. For example, if an employee is listed as earning $12 per hour, but then in practice that employee receives a fixed amount of base pay each pay period, that employee is probably considered a salary basis employee under FLSA.
If the salary basis test is a little confusing, the duties test can have you tearing your hair out. An employee may meet both the salary basis and the salary level tests and still be nonexempt. It is commonly assumed that the salary tests are the only tests, but the most challenging test outlined by FLSA overtime laws is the duties test.
Under FLSA, there are three categories of exempt job duties: executive, professional, and administrative.
Overtime laws allow for executive exemptions. Employees who qualify under this exemption are responsible for more than one subordinate, their primary job function includes supervision of those subordinates, and they also have some say in the hiring/firing/promoting/etc. of those subordinates. It’s possible to get more granular with this category, but it's usually not necessary. If these three criteria are met, an employee likely qualifies under the executive exemption.
Professional job duties is a broad category. Briefly, professional job duties are duties that require some advanced knowledge and skill level, usually something that requires an advanced degree (though this is not necessary). Professional employees must also be able to consistently exercise discretion and judgment over their work. Professions such as lawyers, nurses, engineers, and doctors all qualify as do many creative and computer science jobs. It’s still easy to get tripped up here, though. A creative director who oversees copy, for example, certainly exercises discretion over his or her work, but a junior copywriter, while frequently possessing an advanced degree, may not exercise any discretion at all, which throws into question his or her overtime eligibility.
The murkiest of the bunch is the administrative job duties. Exempt administrative employees must perform non-manual work directly related to the operations of a business. These employees must also exercise discretion and judgment over “matters of significance.” So an office manager would usually qualify as exempt while a receptionist typically would not. Because so many operations roles toe the very blurry line drawn by overtime laws, it can be difficult to properly classify employees who undertake these job duties.
The most important thing to remember about the duties test is that job title is irrelevant. If your title is office manager, but your duties don’t include making discretionary decisions of significance, you are probably nonexempt.
The Final Rule
On December 1, 2016, the Final Rule will go into effect. At that time, the minimum salary level requirement will increase to $47,476 per year ($913 per week). In addition, the Final Rule provides for automatic updates to overtime laws every three years, which means employers will have to pay closer attention to FLSA than ever before to remain in compliance.
It’s also worth mentioning that under the Final Rule, employers may use incentive pay (commissions, bonuses, etc.) to meet the salary level requirement provided that no more than 10% of the employee’s total compensation is made up of incentive pay. If an employee’s base salary is above the minimums set by the law, incentive pay can be any amount of the employee’s total compensation without affecting overtime eligibility.
When in Doubt, Incur the Cost
With all businesses costs on the rise, no employer wants to incur additional expenses. However, failing to comply with the FLSA overtime laws could result in massive penalties that will easily dwarf the cost of compliance. In fact, while costs will increase in the immediate future, the goal of the amendment to overtime laws is designed to increase long-term employee retention, which actually means savings down the road.
The fact that FLSA was recently updated and will continue to be updated every three years indicates that a fair labor standard is once again on the radar of the federal government. They recognize, as all good business owners do, that your employees are the key to your success. Making sure they’re valued at what they’re worth helps to ensure their loyalty and dedication, and that can only be good for your business.
Contact your Pekin Insurance agent about your options for business insurance, and we will help identify the risks your company faces, make recommendations for protection, and help put together a businessowners insurance policy you can afford and feel good about.
Are you in compliance with overtime laws? Let us know if you have any questions in the comments!