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  • The Department of Labor announced a proposal in early March to change the salary-level threshold for white-collar exemptions. This move comes more than two years after a federal judge blocked another attempt to update the threshold for overtime eligibility, although the details of the proposal differ from the 2016 proposal.

    The current salary-level threshold for white-collar exemptions is $23,600 annually, which equates to $455 per week. The DoL’s new proposal seeks to increase the threshold to $35,308 annually ($679 per week) – nearly halfway to the DoL’s 2016 target threshold of $47,476 ($913 per week).

    While the new proposal is notably lower than the blocked attempt, it still marks a nearly 50 percent increase from the current wage threshold. As a result, the DoL “estimates that 1.1 million currently exempt employees who earn at least $455 per week but less than the proposed standard salary level of $679 per week would, without some intervening action by their employers, become eligible for overtime.” That’s a notable change that can have a direct impact on your employee’s compensation.

    Businessman contemplating options regarding the new salary-level threshold proposal from the Department of Labor. 

    Breaking Down the New Overtime Salary-Level Threshold

    The quick explanation of the new proposal is that employees who make less than $35,308 annually or $679 per week may be eligible for overtime pay. Overtime applies to any hours worked past 40 in a given week and will be compensated at a rate of one-and-a-half times an employee’s standard rate of pay. 

    Not all employees would be eligible for overtime pay, however. The job duties of an employee play a major part in deciding whether someone is eligible. As with the current salary-level threshold, employees must pass three tests to qualify for a white-collar exemption from overtime pay:

    • The salary basis test – Exempt employees 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
    • The salary level test – Exempt employees must be paid at least a specified weekly salary of $679 per week
    • The duties test – Exempt employees must primarily perform executive, administrative, or professional duties as defined by DoL regulations (duty definitions can be found on the DoL website)

    The new proposal also increases the salary level for “highly compensated employees” (HCE) from $100,000 to $147,414 per year. This group faces what the Society for Human Resources Management (SHRM) calls a “relaxed” duties test. As such, these employees are exempt from overtime if their primary duty is office or nonmanual work and routinely “perform at least one of the bona fide exempt duties of an executive, administrative, or professional employees.”

    It’s important to note that the term “white-collar exemptions” is used, as the new proposal maintains overtime protections for “blue collar” workers who perform tasks that involve “repetitive operations with their hands, physical skill and energy.” This includes no changes in overtime eligibility for any of the following professions:

    • Police officers
    • Fire fighters
    • Paramedics
    • Nurses
    • Laborers
    • Non-management employees in maintenance, construction, and similar occupations (carpenters, electricians, mechanics, etc.)

    Another difference with the new proposal is that there are no plans to make automatic threshold updates in the future. This is a notable departure from the 2016 proposal, in which the threshold would change every three years to match the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region. This means that if the proposal were to go into effect, it would only lead to the $35,308 ($679 per week) threshold and not any pre-planned adjustments.

    What Can Small Business Owners Do About the New Overtime Proposal?

    It’s currently a waiting game to see whether this new DoL proposal will go into effect or not. Like the 2016 proposal, the new salary-level threshold could run into some roadblocks. Despite this, it’s best to plan ahead just in case the proposal becomes reality. 

    Your options are largely the same as they were back in 2016, some of which may be more feasible than others for your company. The first is to pay newly-eligible employees overtime pay for applicable hours. Another is to limit employee hours to 40 per week to stop any chance of overtime pay. Each route has drawbacks, as paying overtime will increase your payroll and limiting hours may lead to decreased productivity thanks to change in overall work hours. 

    If neither of those ideas sound appealing, there are some other alternatives. One possible way to mitigate the impact of overtime pay is to raise the wage of workers who are close to the salary-level threshold. For example, if an employee regularly worked extra hours makes $34,000 per year, you could increase his pay to $36,000 per year. You’ll need to do the math to see if the change in pay outweighs the potential costs of overtime, but this method can help you control costs while still offering some reward to an employee.

    A more cost-effective, but less popular, alternative is to lower the salaries of newly-eligible overtime employees. This will help you account for overtime costs, but employees won’t approve of decreased pay if they’re eligible for overtime.

    Protect Your Business Through Preparation

    It’s important to take any proposed regulations seriously, especially when you can face a civil monetary penalty of $2,014 for repeated or willful violations of overtime rules occurring after Jan. 24, 2019. There are still plenty of steps the DoL’s new proposal needs to take, but it’s always good to have a plan in place just in case.

    Unfortunately, there’s not always the time or means to stay ahead of new regulations or other changes that could impact your business. That’s why small business owners turn to GMS to help them stay compliant with current laws and prepare for future legislation and regulations. Our team of experts and integrated HR system allows us to take on the administrative burden of small business payroll management and other crucial human resources tasks.

    Ready to prepare for your business’ future. Contact us today to talk to one of our experts about how we can help.

  • With recent changes to the Fair Labor Standards Act (FLSA), many business owners – and their employees – are trying to figure out exactly who qualifies as exempt from overtime pay under the new rules. Unless you’re ready to dig into Department of Labor (DOL) fact sheets and other documents, it’s not always clear just what counts as white collar exemption these days. To help, we’ve put together a breakdown of these exemptions to help you properly classify your employees.

    A group of white collar exempt employees at a business.

    What Qualifies White Collar Employees to be Exempt?

    There are three tests that employees must pass in order to classify them as exempt.

    • The salary basis test – Exempt employees 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
    • The salary level test – Exempt employees must meet the threshold for minimum weekly salary
    • The duties test – Exempt employees must primarily perform a list of set duties

    The thresholds for the salary level changed as of Jan. 1, 2020. In the past, the minimum salary threshold was $455 per week. The recent rule changes officially raised the threshold to $684 per week. That equates to a $35,568 annual salary, 10 percent of which can come via nondiscretionary bonuses, incentives, and commissions that are paid out each year or more frequently. 

    There are also separate stipulations for “highly compensated employees” (HCE). The salary threshold for this group raised from $100,000 to $107,432 per year. Unlike other employees classified as exempt, HCEs face a “relaxed” duties test according to the Society for Human Resources Management (SHRM).

    The Different Exempt Employee Classifications

    While the salary thresholds have changed, the employee classifications listed as exempt have not. These classifications are not based on job titles. Instead, certain types of duties are used to mark an employee for exemption. The DOL lists the following groups as exempt, each with their own duties tests.

    • Executive
    • Administrative
    • Professional
    • Computer
    • Outside sales

    Executive Exemption

    To be considered an executive employee, a person must manage an enterprise, or a recognized department or subdivision of that enterprise, as his or her primary duty. This definition also states that an executive employee must regularly oversee and direct at least two or more full-time employees (or the equivalent in part-time employees). In addition, this employee must have some influence on hiring or firing other employees, whether he or she can outright terminate employees or can influence decisions related to any other type of status change for other employees. There is also a stipulation that any employees who are actively engaged in management and own at least 20 percent equity interest in the enterprise in their place of employment are considered exempt.

    Administrative Exemption

    Administrative employees are judged by a pair of tests. First, the employee must primarily perform office or non-manual work that is directly related to management or general business operations. Second, administrative employees must “exercise of discretion and independent judgment with respect to matters of significance” which refers to the level of importance or consequence of their primary duties. This discretion and judgment implies that an administrative employee evaluates various courses of action and has authority to decide which is best for the business.

    Professional Exemption

    The DOL has guidelines for two different types of exempt professional employees: learned professionals and creative professionals. Learned professionals must primarily perform work that requires “advanced knowledge.” This knowledge involves work that requires consistent discretion and judgment and must be “predominantly intellectual in character.” The DOL also stipulates that this knowledge be in a field of science or learning. As for creative professionals, their primary work should require a form of invention, imagination, originality, or talent in a recognized artistic or creative field.

    Computer Exemption

    Employees classified under the computer exemption are those employed as a systems analyst, programmer, software engineer, or some other type of skilled individual who operates in the computer field (not including manufacturing or repair). The DOL also stipulates that these employees’ primary duties involve one or more of the following tasks.

    • The application of systems analysis techniques and procedures to determine hardware, software, or system functional specifications
    • The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes based on and related to user or system design specifications
    • The design, documentation, testing, creation, or modification of computer programs related to machine operating systems

    Outside Sales Exemption

    Unlike the other classifications, the FLSA’s salary requirements do not apply to outside sales employees. To be considered part of this exemption, an employee’s primary duty must involve either making sales or obtaining orders/contracts for either services or for the use of facilities. In addition, an outside sales exempt employee must regularly work outside of his or her employers place(s) of business.

    Why is it So Important to Correctly Classify Exempt Employees?

    Employee misclassification can lead to a series of issues. Not only can misclassification impact the compensation for certain employees, it can also affect benefit plan eligibility, payroll taxes, and other crucial details. Not only can these mistakes be a huge issue for your employees – Joe Schmo from the warehouse won’t be thrilled if he’s classified as exempt – you’re putting your business at risk with the law as well.

    There are serious financial consequences if the Bureau of Workers’ Compensation (BWC) finds out that you’ve misclassified employees. There are a variety of potential penalties you can face depending on the severity of the situation:

    • The collection of unpaid wages
    • Back taxes
    • Additional penalties for failing to deduct and withhold taxes for misclassified employees
    • Punitive damages from lawsuits for unpaid wages and taxes

    In addition to the initial penalties, you can bet that you’ll end up on the BWC’s radar. Businesses that misclassify employees are known as potential repeat offenders, which means that these penalties will make it more likely for the Department of Labor and OSHA to audit your business in the future, even if the initial misclassification was the result of a simple mistake.

    Protect Your Business from Misclassification Mistakes

    Proper employee classification is very important, but it’s not necessarily easy to make the right call for every employee if you haven’t spent the time necessary to learn all the appropriate classifications. Meanwhile, you still have a business to run even after you’re done trying to figure out tedious HR management tasks.

    While you may not have extensive HR expertise, the experts at GMS do. In addition to helping you avoid costly misclassification issues, we can help you simplify and strengthen your business through payroll management, employee benefits administration, and other crucial tasks. Contact GMS today to talk to us about how we can help you save precious time and protect your business through professional HR management.