OUR THOUGHTS ON:

Salaried Employees: Big Pay Raise on the Horizon?

Audit|Not-for-Profit|Tax

By Adam Goode

We’re expecting the U.S. Department of Labor’s (DOL) proposed revisions to the Fair Labor Standards Act (FLSA) to be finalized as soon as May or June of 2016.  These proposed changes seek to raise the salary threshold required to qualify for the overtime exemption, which the DOL estimates will impact nearly 5 million workers within the first year of implementation. 

The impending rule changes were initiated in March of 2014 with a Presidential memorandum directing the DOL to update the FLSA’s wage and overtime standards; the effect of the update would make more employees eligible for overtime pay.  In June 2015, the DOL introduced its proposed changes with a comment period open until September 2015.  Following nearly 300,000 comments, the DOL sent its final rules to the White House’s Office of Management and Budget (OMB) in March of 2016.  It’s expected that the OMB will take anywhere from 30 to 60 days to review and finalize the rules, which will take effect 60 days after its publication.  If the OMB issues its final rules in June 2016, employers will have until August 2016 to react to these changes before they take effect.  

Before we address the proposed changes, let’s start with the rules as they stand today.  Under the FLSA, employees must be paid 1 ½ times their regular pay rate for any hours worked in excess of 40 hours a week.  The FLSA does provide a number of white collar exemptions to this overtime rule.  To qualify for this exemption, employees would generally need to meet a duties test and a salary test.  The current salary test, which hasn’t changed since 2004, requires that for an employee to be exempt from overtime pay, the employee would need to be paid at least $455 per week ($23,660 per year). 

The proposed changes, to date, are aimed at the salary test and would make the following changes to the FLSA:

  1. The salary threshold for exemption would be raised from $455 per week to an amount equal to the weekly earnings of the 40th percentile of full-time salaried employees.That amount is currently estimated to be $970 per week ($50,440 per year).
  2. The salary threshold would be subject to an annual automatic increase either by a fixed percentile of earnings or by tying the increase to a consumer price index.

Without much time left to react, employers need to understand these rule changes and how they might impact their business and operations.  We recommend, at a minimum, that employers consider the following as they prepare for these changes:

  • Collect all current salary, bonus and hours data to determine the best course of action for their business.
  • Until we have a final ruling, the $970 per week ($50,440 per year) threshold is only an estimate.Employers should be prepared for scenarios both below and above that amount.
  • Consider whether amounts normally paid in the form of bonuses can be converted to salary.
  • Determine if a process is in place to accurately track hours worked for current exempt employees who may be switching to hourly.
  • Determine if staffing changes are required to enable the employer to keep an employee’s hours under 40.
  • Determine if new policies are needed to ensure that hourly employees don’t exceed 40 hours in a week.Employers may need to factor in work-from-home time, time an employee is checking and responding to email and other such time that isn’t strictly tracked today.Employers may also want to consider a process for overtime authorization to help manage payroll expense.
  • If the employer decides to switch salary employees to hourly, analyze the potential impact that change might have on employee benefits.
  • If the employer decides to increase employees’ salary to meet the minimum threshold for exemption, remember that there will be a mechanism in place for the minimum threshold to rise on an annual basis.The employer would need to continue to increase these employees’ salary by that increased amount in order for the employee to continue to be classified as exempt.
  • Evaluate potential employee morale issues that these changes may have.Determine how these changes should be communicated to employees.Instances such as changing an employee from salary to hourly, giving pay raises to less-experienced employees, changing benefit classification and other changes can all have an adverse effect on employee morale.

For more information about these changes or to discuss how they might impact your business, please contact us.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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