Department of Labor Set to Increase Exempt Employee Salary Level

November 2, 2015
Department of Labor Set to Increase Exempt Employee Salary Level

Written by: Melissa Hobson

The US Department of Labor (DOL) currently allows businesses who employ executive, administrative, and professional positions to pay them a salary as opposed to an hourly wage plus overtime pay for hours worked over 40.  When an employee is paid a salary of at least $455 per week ($23,660 per year), they are considered to be exempt with regards to overtime regulations.  Employers pay exempt employees a set salary whether they work 20 hours or 60 hours.  DOL has now issued their proposed amendments to the Fair Labor Standards Act that will more than double that threshold.  This will directly impact millions of employers. 

So what does this mean for employers?  As it stands now, the white collar exemption threshold will be raised to $970 per week ($50,440 annually).  There may be a slight fluctuation in the amount before the regulations are passed, but most likely won’t deviate drastically.  Any employer paying less than that to a salaried, exempt employee will have changes to make in how they pay. 

So when will employers have to make this change?  This regulation hasn’t passed yet.  However, it’s expected to pass in early to mid 2016.  Employers will have somewhere between 60 to 120 days to become compliant with the change.

Why are they changing the threshold?  This very large increase, may be in part, a response to various industries that have a long-standing history of paying lower salaries for management level positions and then requiring a large amount of overtime hours to be worked.  One example:

  • Cheryl is promoted to a night-shift manager at a retailer.  She’s given a salary of $28,000 per year.  Before her promotion, she was working 30 hours weeks at $9.50 per hour.  That averaged out to $14,820 per year.  She happily accepted the new position as it  is almost double the pay of what she previously earned.  However, the new position requires a standard 48 hour work week and 54 hours per week during a 6 week holiday season.  She went from working 1560 hours per year to 2532 hours per year.  If she had remained at her old pay rate of $9.50, she would have ended up earning $26,201.  Essentially, Cheryl took on a position with an extensive amount of responsibility, handles money, makes schedules, and is in charge of a number of employees.  In the end, she isn’t really making much more than she was before. 

How will this impact employees working on commission or receiving bonuses?  There is no provision made yet as to whether commissions or bonuses will count towards the threshold.  If an employee earns $25,000 per year and is on pace to earn an additional amount of $60,000 in commission pay for the year, they will be over the threshold when commission is added in.  However, if they determine that they will not count commission, those employees would be below the threshold and need to be reevaluated.  Also, if an employee earns $50,000 per year and receives a bonus for $500, they will be over the threshold if the DOL includes bonuses.  But under the threshold if they don’t.  So they would need to be reevaluated as well.

What steps can employers take now to ensure they are prepared?  The first step will be to asses which employees will be impacted.  Employees earning a salary below $50,440 will be impacted.  There are a few different options that employers can take. 

  • Raise affected employee’s salary from their current rate to the new rate of $970 per week.  This is most-likely not feasible for many employers and will have significant cost increases.
  • Change salary employees to an hourly rate.

Most employers that will be making this decision, will be switching the affected employees to an hourly rate.  Before the rate is established, it’s important to take into account the number of hours that the employee works.  If an employee currently earns $40,000 per year, here are some calculations and considerations:

  • Employee works 40 hours per week.  That rate would calculate to $19.23 per hour to stay on par with the original $40,000 per year salary
  • Employee works an average of 48 hours per week.  That rate would calculate to $14.79 per hour to stay on par with the original $40,000 per year salary
  • Employer calculates new pay rate based on 40 hours and sets the rate at $19.23.  Employee ends up working 8 hours of overtime each week that the employer didn’t factor in.  The employee would actually earn $12,000 more per year than the employer had expected.

As you can see from the above calculation, evaluating the hours per week when switching from salary to hourly is critical. 

If Stephenson and Warner, Inc. prepares your payroll, we will partner with you on evaluating the affected employees.  As always, please feel free to contact our office with any questions.