June 2016
After a long wait, we now know the new salary threshold for the white collar exemptions and their effective date. In this month’s Advisor Newsletter, we’ll be continuing our coverage of the FLSA changes.
HR Alerts
Final FLSA White Collar Exemption Rules Announced
The Department of Labor has announced the new salary threshold for certain employees to qualify as exempt from minimum wage and overtime under the Fair Labor Standards Act’s White Collar Exemptions.
Effective December 1, 2016, the new minimum salary level will be $47,476 per year ($913 per week). Up to 10% of this income may come in the form of non-discretionary bonuses, incentive pay, or commissions, as long as that portion of the compensation is paid at least quarterly. In the event that an employee does not earn enough in bonuses and commissions to meet the full minimum salary requirement, a catch-up payment can be made by the employer once a quarter.
The minimum salary requirement applies to all white collar workers who are classified as exempt executive or administrative employees, and to many who are classified as exempt professional employees. As anticipated, the duties tests for the White Collar Exemptions have not changed.
Under the new rules, this salary threshold will increase every three years. It will be set at the 40th percentile of weekly earnings among full-time salaried (not necessarily exempt) employees in the country’s lowest income region – currently the South. It is expected that the next change, which will be effective January 1, 2020, will increase the minimum salary to approximately $51,168.
The new rule also increases the minimum salary threshold for the Highly Compensated Employee (HCE) exemption from $100,000 per year to $134,004 per year. This exemption can be used when an employee carries out a limited number of executive, administrative, or professional duties, but is very well-compensated. The new rule sets the HCE threshold at the 90th percentile of all full-time salaried workers nationally. This number will also increase every three years, and is expected to rise to approximately $147,524 on January 1, 2020.
Some state laws create different minimum salary levels. When state laws differ from the FLSA, an employer must comply with the standard most beneficial to employees. Come December 1, the federal minimum salary level will be higher than any state-mandated minimum, and therefore must be followed.
In preparation for the new rule, we have created the following materials, all of which can be found in the HR Support Center:
FLSA Changes: Decision Making Guide
FLSA Changes: Implementation Guide
2 Minute HR trainings on the new rule, the executive, administrative, and professional exemptions, the highly compensated employee exemption, the outside sales exemption, and the salaried non-exempt classification
A memo requesting that employees track their hours for planning purposes
A letter to employees regarding their classification change
A guide to calculating overtime for non-exempt employees who receive non-discretionary bonuses or commissions
What Are the FLSA White Collar Exemptions?
With all the talk about the new white collar overtime exemptions, you may be wondering what these exemptions are and whether they apply to your organization. In a nutshell, they pertain to whether certain employees must be paid overtime rates for hours worked over 40 in a week. While most employees must be paid at least minimum wage and time-and-a-half for overtime, some employees can be classified as exempt from these requirements. The most common way to classify employees as exempt is with one of the “white collar exemptions.”
Among these, the most commonly used white collar exemptions are the executive, administrative, and professional exemptions. These may be applied when the position/employee passes three tests:
They perform non-manual work and their primary duties are executive, administrative, or professional.
They make a minimum salary of $455 per week, which equals $23,660 per year ($913 per week and $47,476 per year beginning December 1).
They are paid on a salary basis, meaning they receive the same pay each week regardless of number of hours worked, or the quantity or quality of their work.
Some employees whose duties qualify them for the professional exemption – bona fide teachers and practicing doctor and lawyers – do not have to be paid a minimum salary, or on a salary basis; they only have to pass the duties test. However, some states don’t allow this exception to the salary rules (e.g. California), so employers should double check state law before taking any liberties with these types of employees.
Another way employees can be exempt is if they qualify as a highly compensated employee (HCE). This exemption may be applied if the employee passes three different tests:
They perform non-manual work, and customarily and regularly perform at least one or more executive, administrative, or professional duties.
They receive total compensation of at least $100,000 per year ($134,004 beginning December 1).
They make at least $455 per week, every week, on salary basis ($913 beginning December 1).
When would you want to use the HCE exemption? Consider a CEO’s executive assistant making $125,000 per year. His primary duties include typing dictated letters, making travel arrangements, placing phone calls, and party planning—none of which are exempt duties. But he also manages two full-time administrative assistants; this responsibility doesn’t take up much of his time, but it is something that he does regularly. Based on his job duties as a whole, he doesn’t pass the test to be properly classified as an executive, but since he makes over $100,000 per year and performs at least one executive duty on a regular basis, he can be properly classified as exempt as an HCE.
Keep in mind that classifying an employee as exempt is a benefit to the employer. You are never required to classify an employee as exempt, and you may always pay them on an hourly basis, regardless of duties or pay. You’ll just have to pay an overtime premium for hours worked over 40 in a week.
Question & Answer
Q: We have two currently salaried employees who make about $42,000 per year. However, with commissions, we estimate that they will make $48,000 or more per year. They can still be exempt, right? What happens if their commissions do not exceed the minimum of $47,476 as expected? We’ve double checked the duties test and they both qualify as executives. We’re just worried about the salary threshold.
A: Great questions! This is definitely something employers with commissioned employees will want to keep an eye on. You are correct that if these employees make over $48,000, they can remain exempt. Up to 10% of the minimum salary threshold – $4,747 – may come from non-discretionary bonuses, commissions, or other incentive pay. Your commissioned employees will therefore need to be paid a guaranteed base salary of $42,729.
These incentive payments must be made on at least a quarterly basis, and if the employee does not earn enough of the incentive pay to reach the exempt salary threshold (pro-rated for the quarter, month, or whatever period you’re using), the employer must pay the difference in order to keep the employee’s exemption intact. The DOL calls these “catch-up payments.”
Here’s how these catch-up payments work. Because the annual salary threshold will be $47,476 and incentive pay must be made on a quarterly basis, commissioned employees need to make at least 25% of that amount (or $11,869) in base pay plus commission each quarter. If they make less than that amount per quarter, you’ll need to make a catch-up payment to cover the difference.
This payment must be made within one pay period and must only count toward their income during the previous quarter. If you fail to make a sufficient catch-up payment, the employee will be entitled to overtime pay for any overtime hours worked during that quarter.
The Do’s and Don’ts of Social Media Policy
Chances are most of your employees are on social media, and some of them may be using their private accounts to say things about their employment. Frustrated employees might even be complaining about their working conditions – or about you.
While it may seem prudent to ban employees from saying anything negative about your organization online – or perhaps even discussing work at all – the National Labor Relations Board, which interprets the National Labor Relations Act, has ruled that this kind of restriction is illegal. That said, employers can still encourage employees to think before they speak (or type), and remind them that behavior akin to unlawful harassment of their co-workers may still lead to discipline.
Also be aware that 23 states have already implemented social media privacy laws for employees, so you’ll want to ensure you’re not overstepping any legal requirements when drafting your social media policy.
Here are a few Do’s and Don’ts to keep in mind when creating one:
DO… Maintain control over company social media accounts. As the employer, you own them and have a right to access them. You should always have the current credentials to access company social media, even if you assign an employee or outside party to oversee the accounts.
DO… Respect the privacy of employees. Even publicly-viewable social media accounts are part of the personal lives of your employees. Monitoring the personal conversations of your employees indicates you don’t trust them. Employees who believe their employer doesn’t trust them will be less engaged and committed.
DO… Encourage employees to be respectful and to avoid statements that could be interpreted as threatening, harassing, or defaming. You can tell them not to present their opinions as those of the company and to refrain from sharing confidential company information on social media. Put employees on notice that you may request to see their social media activity if it’s relevant to an investigation of misconduct. State laws generally say you may request access to an employee’s personal social media only if you’re conducting an investigation into that employee’s alleged misconduct and you have a reasonable belief that the employee’s personal social media activity is relevant to the investigation.
And now for the Don’ts:
DON’T… Examine the social media accounts of applicants or employees. If you were to learn information about a protected class or protected activity, and then made an adverse decision regarding the employee or applicant, you could open yourself up to claims of retaliation or discrimination. Generally, it’s best that employers and supervisors not be online “friends” or “followers” of their employees.
DON’T… Restrict concerted activity. According to the National Labor Relations Board (NLRB), employer social media policies should not be so sweeping that they prohibit (or would seem to discourage) the kinds of activity protected by federal labor law, such as the discussion of wages or working conditions among employees.
DON’T… Ignore the laws. While state laws differ, they share some general themes. First, the laws prohibit employers from requiring or requesting that employees or applicants disclose their login credentials (usernames or passwords). Second, the laws say you can’t require or request that an employee or applicant access their personal social media in your presence or add you to their contacts or friends list. If an account is private, you shouldn’t try to gain access to it. Third, the law prohibits retaliation on your part. For example, if you were to discipline an employee for refusing to show you what’s on their social media timeline, or not hire an applicant who refused to do the same, you’d be in violation of the law.
In conclusion, if you have employees working in any of the states with social media privacy laws, it’s a good idea to examine the specific laws to make sure you’re not in violation. But even if your state has no social media privacy law, we recommend using a social media policy that encompasses the advice above. You can find a ready-to-use social media policy in the HR Support Center in the Policy Library, under the Tools tab.
Tool of the Month:
1094-C Reporting FAQ
The 1094-C form is basically a cover letter (similar to the W3) for the transmittal of 1095-C forms to the IRS. In this FAQ, we’ll go over the 1094-C’s trickier sections and terminology so you’ll be able to complete the form with ease.
