This post focuses on how the U.S. Department of Labor’s new overtime rules may, or may not, affect selected compensation programs and components. From a compensation practitioner’s perspective, there are two overriding considerations to keep in mind:
- The Fair Labor Standards Act (FLSA) defines the criteria for classifying employees as exempt or nonexempt. An organization’s compensation programs need to comply with the FLSA.
- Exemption status is determined by the work that job incumbents (employees) perform on a day-to-day basis, not by job title or pay grade.
Job Titles and Descriptions
Exempt or nonexempt status is based on what an employee does, not what the job title or job description says.
Job title alone does not establish whether an employee is exempt or nonexempt. Technically, exempt and nonexempt employees could share the same title since exemption status is employee-based and centers on the work actually performed by each employee. That said, having exempt and nonexempt employees occupying the same job title can be confusing, hard to explain, and risky to manage.
The new overtime rules do not change the job duties tests for determining exempt/nonexempt status or require employers to update their job descriptions. But now is an opportune time to do just that — to make sure descriptions accurately capture the work employees actually perform. Closing any gaps between actual work performed and written descriptions can go a long way towards compliance.
Pay Grades, Ranges, Structures
Pay grades, ranges, and structures are internal control mechanisms. Because the FLSA does not impose any specific requirements on them, organizations can have exempt and nonexempt jobs in the same pay structure or even the same pay grade due to market values or internal job evaluation criteria.
To avoid confusion, however, some organizations choose to assign exempt and nonexempt jobs to separate pay structures to keep clear lines between the jobs. Even in these cases, the pay ranges for exempt and nonexempt jobs may overlap. Nevertheless, employees must be classified correctly as nonexempt or exempt regardless of pay range values.
Paying employees below the new overtime pay threshold of $47,476 annually ($913 weekly) will automatically make them nonexempt beginning on December 1, 2016. Paying employees above the threshold, however, will not automatically make them exempt. Employees still will have to meet the salary basis and job duties tests.
While not technically required under FLSA, now may be a good time to review and realign pay ranges and pay structures to eliminate potential confusion and bolster compliance with the new overtime rules.
Caution: There are no one-size-fits-all answers since pay grades, ranges, and structures vary by organization.
Pay Rates and Frequency
As one of the prerequisites to qualify for exempt status under the FLSA, employees must be paid on a salary basis that is not subject to reduction based on quality or quantity of their work. Salary can be quoted in terms of weekly, monthly, or annual pay. It is important to recognize that if earnings fluctuate according to hours worked, the salary basis test is not met. In such cases, employees are automatically nonexempt. Conversely, employees are not automatically exempt if they are paid a salary. Their salary still must meet the salary level test ($47,476 annually, $913 weekly, beginning December 1), and the work they perform must meet the job duties test for the specific exemption that is claimed.
Bonus and Incentive Plans
Employees eligible to participate in compensation incentive plans or paid bonuses are not automatically exempt. They still must meet the salary basis, salary level, and job duties tests. Special requirements apply to highly compensated employees (HCEs). To qualify for the HCE exemption under the new rules, employees will need to make at least $134,004 in total annual compensation, receive a minimum salary of at least $913 per week, and pass a minimal duties test.
Nondiscretionary bonuses and incentive payments can be used to satisfy up to 10% of the new minimum salary threshold, provided they are paid quarterly or more frequently, and no later than the month following the end of the quarter. This provision effectively lowers the new $47,476 salary threshold to $42,728.40 annually, since $47,476 x 10% = $4,747.60, and $42,728.40 + $4,747.60 = $47,476. It’s important to note that nondiscretionary incentive payments cannot be applied toward meeting the new weekly salary threshold for HCEs.
Cutting things this close may be risky, especially since the incentive payments cannot be discretionary and are typically subject to performance metrics that are variable by their very nature. And, don’t forget that nondiscretionary incentive payments for nonexempt employees must be included in their regular rate of pay and will count when calculating overtime pay. Misclassifications can be costly.