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Are You Prepared for the Big Changes that will Affect the Way You Pay Overtime?

Updates to the FLSA Take Effect on December 1, 2016

By Jodi Schafer, SPHR, Owner, General Partner, Human Resource Management Services

In May of this year the Department of Labor (DOL) announced a BIG update to the nation's overtime rules. By raising the salary threshold under which white-collar salaried workers qualify for overtime pay to $47,476 per year, more than 4.2 million workers will get overtime protections or see a rise in their salary above that threshold. Think about that for a minute -- How many employees do you currently have on payroll who are salaried (exempt), but earning less than $47,476? Effective December 1, 2016, all of those employees will qualify for overtime pay unless you increase their base salary above this new amount.

While this rule change does not affect all employers, it will affect those covered entities who have more than $500K in annual sales and/or have employees engaged in interstate commerce (ie: accepting/processing credit card payments, receiving goods/services from out-of-state vendors, making or receiving interstate phone calls, etc.) must all comply with the Fair Labor Standards Act, including these new provisions.

These most recent updates to the Fair Labor Standards Act align the salary threshold more closely with current compensation trends -- something the DOL hasn't done in more than a decade. The Obama Administration believes that increasing the salary threshold that employers must pay in order to classify someone as 'exempt', will result in higher wages for workers and a more competitive marketplace. Many business owners aren't so optimistic. Regardless of which side of the debate you fall on, we can all agree that a lot has changed since 2004 when the DOL first increased the salary threshold for exempt employees to its current level ($455/week). Earning rates have increased, as has the cost of living. So it stands to reason that the salary threshold would need to be adjusted to keep pace. The problem is, because the DOL hasn't adjusted these earning minimums in over twelve years, there is a lot of catching up to do... $23,816 per years' worth to be exact.

The Department of Labor first started looking at this issue in March, 2014 as a result of a directive from President Obama. The DOL released proposed updates for public comment in 2015 and at that time the Department recommended raising the salary threshold from $455/week ($23, 660 annually) to $970/week ($50,440 annually). As you can imagine, a jump of this size would've had a significant financial impact on many employers, including those in the hospitality and tourism industries! After reviewing over 270,000 comments and meeting with more than 200 employer and employee organizations, the DOL published the final Fair Labor Standards Act (FLSA) language in May of this year. The new salary threshold was set at $913/week ($47,476 annually), slightly lower than originally proposed, and now allows for up to 10% of this amount to consist of non-discretionary bonuses and incentive/commission payments -- provided these forms of compensation are paid at least quarterly.

This increase will NOT be introduced gradually. Rather, on December 1st of this year, the minimum earning level of an exempt employee will more than double to $47,476. To prevent FLSA compensation levels from becoming outdated in the future, the DOL will automatically update the earning thresholds every three years (beginning in 2020) to coincide with 40th percentile of full-time salary earnings in the lowest wage Census Region of the U.S. -- currently the Southern region. We will dive deeper into the financial and cultural impact of these changes in upcoming articles, but suffice it to say that this issue isn't going away. Just about the time you put a solution in place for the upcoming year, you will need to begin thinking about how future increases (beginning in 2020) will continue to affect you, your workforce and your bottom line.

Find out if you have to comply with the Fair Labor Standards Act (FLSA) >>

 

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