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New Wage and Overtime Laws for 2016

Originally published: 01.01.16 by Dr. Phillip Geist


The United States Department of Labor (US DOL) is amending the Fair Labor Standards Act in an effort to update it to take wage changes and inflation since the last update in 2004 into account. The Final Rule announcements are expected within the next few months, and will apply to calendar tax year 2016 and beyond.

The US DOL website highlights some of the changes, but notes that only some information is known at this time, with the balance still to be finalized.

The Notice of Proposed Rulemaking (NPRM) focuses primarily on updating the salary and compensation levels needed for white-collar workers to be exempt. Specifically, the Department proposes to:

  1. Set the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers (expected to be $970 per week, or $50,440 annually);
  2. Increase the total annual compensation requirement needed to exempt highly compensated employees (HCEs) to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers (expected to be $122,148 annually); and
  3. Establish a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption.

The Department's proposal to set the standard


salary level at the 40th percentile of weekly earnings for full-time salaried workers represents the most appropriate line of demarcation between exempt and nonexempt employees.

This salary level minimizes the risk that employees legally entitled to overtime will be subject to misclassification based solely on the salaries they receive, without excluding from exemption an unacceptably high number of employees who meet the duties test. As proposed, this would raise the salary threshold from $455 a week (the equivalent of $23,660 a year) to about $970 a week ($50,440 a year) in 2016.

The Department is also proposing to automatically update the standard salary and HCE total annual compensation requirements to ensure they remain meaningful tests for distinguishing between bona fide executive, administrative and professional workers who are not entitled to overtime and overtime-protected white collar workers.

The DOL is amending the "white collar" exemptions that exclude certain "executive, administrative and professional" employees from overtime exemptions. A worker's status as an exempt executive, administrator or professional is based primarily on salary level and duties.

This is one of the areas still under review. The DOL is considering setting a percentage of the time these employees may perform other duties and still be considered exempt. If they exceeded the allowable hours, they would no longer be exempt and would be eligible for overtime pay. Additionally, under the proposed regulations, managers and other professionals who earn a salary lower than $50,400 will still be entitled to overtime even if their primary duties are exempt.

According to the DOL, the revisions will "simplify the identification of non-exempt employees" and make the exemptions "easier for employers and workers to understand." This clarity may reduce disputes and litigation costs in the long term. As a result of these changes, employers will have to either raise salaries to meet the new salary threshold or reclassify workers and start paying them overtime.

Until the final rule is announced, the key for employers will be to begin gathering the information necessary to apply the new test once it is known. Not only will this head off any current misclassification you may uncover in the process, but it also situates employers to act as soon as the DOL releases the final language. The DOL expects the regulations to be in effect 60-90 days after publication of the final rule.

First and foremost, employers may want to perform an internal audit of their job titles and descriptions to ensure they're appropriately classified as exempt or non-exempt. While employers always make sure jobs are classified correctly at the outset, these duties can look different a few years down the road. As individuals and job duties evolve, depending on the skill set of the employee, the needs of the organization or even changes to technology, human resources isn't always kept apprised of these changes in a timely fashion.

Taking stock of exactly what duties are being performed and making any necessary changes to job descriptions on a fairly regular basis can help prevent misclassification. In the case of the proposed changes to the FLSA, going through this internal review process is particularly important for any non-exempt employees making more than the current $23,600 figure, but less than the new threshold. The bottom line: Be prepared.

Here are a few frequently asked questions of which you should also be aware:

Q: If the final rule is not published until mid-2016, will the rule be retroactive to January 1, 2016?

A: Yes.

Q: How will the calculations be performed for a corporation with a fiscal year that is not the same as the calendar year?

A: The Final Rule will address this, unknown at this time.

Q: If an employee is paid enough to be exempt under the Final Rule, but performs duties not deemed "executive," will they still be considered exempt in the future?

A: The Final Rule is expected to include maximum percentages of time that exempt employees may spend on non-exempt duties and still be considered exempt. If this is a concern, you may want to track the time spent on non-exempt duties beginning January 1, 2016 to be able to plan better once the Final Rule is published.

Q: Are other changes coming in 2016?

A: The Department of Labor released a revised Worker Rights Under Executive Order 13658 Notice, stating that as of January 1, 2016, Federal Contractors must pay a minimum wage of $10.16 to hourly employees, and a minimum of $5.85 hourly to tipped employees. Executive Order 13658 applies to:

  • Procurement contracts for services or construction.
  • Contracts for services covered by the SCA.
  • Concessions contracts.
  • Contracts entered into with the Federal Government "in connection with Federal property or lands and related to offering services for Federal employees, their dependents, or the general public."
  • Contracts where the wages of workers are governed by the Fair Labor Standards Act (FLSA), the Service Contract Act (SCA) or the Davis-Bacon Act (DBA).

The proposed rules will change labor costs for many small businesses. You should follow news regarding the Final Rule, review your job descriptions, consider consulting an employment (HR) or employment law (attorney) specialist to help you plan and implement any changes if your business is affected by the Final Rule.

In addition, review your financial ratios (paying close attention to labor costs and margins), and update your business plan to ensure you'll maintain profitability in spite of any changes the Final Rule imposes on your business.

 


Dr. Geist joined the UNF SBDC in 1996 to help the University of North Florida Small Business Development Center expand services into new areas. Dr. Geist serves on several economic development boards in the counties he serves, boards of numerous civic and educational organizations, and was a charter appointee to the U.S. SBA Advisory Board for Florida since its inception in 1997. For additional information, visit sbdc.unf.edu.

 




About Dr. Phillip Geist

Dr. Phillip Geist

Dr. Geist joined the UNF SBDC in 1996 to help the University of North Florida Small Business Development Center expand services into new areas. Dr. Geist serves on several economic development boards in the counties he serves, boards of numerous civic and educational organizations, and was a charter appointee to the U.S. SBA Advisory Board for Florida since its inception in 1997. For additional information, visit sbdc.unf.edu.




Articles by Dr. Phillip Geist

New Wage and Overtime Laws for 2016

The United States Department of Labor (US DOL) is amending the Fair Labor Standards Act in an effort to update it to take wage changes and inflation since the last update in 2004 into account.
View article.