Will Your Exempt Employees Continue to be Exempt in 2016?

by Renee Mielnicki, Esq.

What does it mean anyway when we call an employee “exempt?” It’s actually a legal term which describes a category of employees who are “exempt” from overtime pay. This term has a legal meaning under both state and federal law. It means the employer does not have to pay the employee one and a half times their regular rate of pay for any hours worked over 40 hours in a workweek. That’s a really nice way to save money for an employer . . . if the employee is truly exempt that is. Let’s take a look at what exempt really means first before I explain how it’s about to drastically change for 2016.

As I said above, the term “exempt” can have different meanings under both state and federal law. For purposes of this article though, I am only going to focus on the federal law definitions of an exempt employee since it is the federal law that is about to change. There are many different reasons that an employee may be classified as exempt under federal law. However, the most common ways are those known as the “white collar exemptions.” overtime executiveThey are: (1) the executive exemption; (2) the administrative exemption; (3) the professional exemption; (4) the outside salesman; (5) computer professionals; and (6) highly compensated employees. To learn more about the criteria required to consider an employee exempt under each of these categories, go to the Topical Fact Sheet Index on the U.S. Department of Labor’s website and click on the category.

So, not only does an employee need to fit neatly into one of these exempt categories (called a duties test), but they also have to meet what are known legally as the salary basis and salary level test. Here is what those laws say in a nutshell. We are not allowed to take any deductions from an exempt employee’s pay unless the deduction is specifically permitted under this law (examples are a deduction while an employee is on leave under the Family Medical Leave Act or where the employee misses a full day of work for personal reasons). In addition, the employee has to have a guaranteed minimum amount of money per week that he can count on receiving in any week that he performs work (i.e. the salary basis). Lastly, the salary level test states that an exempt employee cannot be paid less than $23,600 per year (or $455 per week). Lots of rules here, I know.

Well, luckily, the Department of Labor (DOL) has proposed to change only one component of the salary basis rule, but . . . it’s a biggie. I bet you can guess which one based upon what I told you in the last paragraph. Well, if you didn’t, it’s the salary level requirement portion. President Obama instructed the DOL to reevaluate the $23,600 per year (/$455 per week) component since that level has not been adjusted in years. Under the current law, a truly exempt employee could be required to work an unlimited number of hours per overtime professionalweek and only be compensated $23,600 per year. Hence, the proposed change in the rule.

So what is the new amount going to be and what will this mean for employers? The DOL just issued their proposed rule on June 30, 2015 stating that the new proposed amount is $47,892 or $921 per week. For highly compensated employees, those making over $100,000 per year, the new amount is proposed to be $122,148.

Notice I used the word “proposed.” That’s because it is not the rule yet. At this time, the DOL has simply issued a proposed rule where the public has about 60 days to submit comments regarding these changes. Once the comment period closes, the DOL will then issue a final rule that will become effective. The final rule is expected either the end of 2015 or beginning of 2016.

As far as the future implications of the new rule, it’s simple. If you have any truly exempt employees, they will have to be paid no less than the new salary level (again, which may be in the neighborhood of $47,892 per year). If you don’t pay these employees this amount, the employee will no longer be exempt under the law and any hours worked over 40 hours in a workweek will have to be paid at one and a half times the employee’s regular hourly rate (an avoided liability if the exempt employee is paid at the required salary level).

This new requirement is causing quite a stir among employers, especially those in the food and retail industry where exempt employees may not be paid at this level. Employers should prepare in advance by reviewing the compensation of exempt employees. If any exempt employee is paid below the new proposed salary level, employers should begin to think about increases in compensation, or, if such is not feasible, a reduction in hours to 40 or under per workweek or a reclassification of duties, if such is possible.

If you have questions about exemptions or overtime, drop us an email at hrhelpline@eastcoastrm.com. We will be happy to help.

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