Salary and Duty Test Worries? Instead, Have It Your Way

Labor & Employment Newsletter

Client Alert

The U.S. Department of Labor (DOL) recently published proposed rules increasing the salary to be overtime-exempt to an estimated $50,440 per year as of January 2016. There will likely be an automatic annual salary escalator built into the final regulations, with a current preference by DOL to use the 40th percentile nationally of all salaried employees. It is unknown whether there will be changes to the “primary duty” test for executive, professional, and administrative employees, but comments have been requested, and changes to the duties could still be inserted into the final regulations. The favored DOL position appears to be a requirement that, for an exemption to apply, more than 50 percent of an employee’s work time should be spent on exempt duties. Even in this modern era of technology, it is difficult to accurately track what an executive, professional, or administrative employee does every minute of every day.

If you have overtime-exempt employees making less than $50,000 per year who play an important role in your organization and you have to decide if you can justify paying a higher salary, consider these options:

1. Increasing the salaries for truly important personnel to meet the new minimum thresholds. For a number of years, if a particular employee who was being reviewed for exempt status did not make a salary of around $50,000, then as a rule of thumb, some practitioners would question whether the individual’s duties are important enough to the organization for him to qualify under the duties test, and the DOL has admitted they look at that too. Keep in mind that the DOL may allow some non-discretionary bonuses and incentive pay, probably not more than 10 percent of the salary, to count toward the required annual salary.

2. Assign more non-exempt duties to lower-level employees while restricting clearly exempt duties to certain employees or job classifications.

3. Take the easy but possibly more expensive way out, and simply convert more employees to hourly pay status, with time and a half after 40 hours of pay. However, be careful of the various state and local laws that set higher minimum wages than under federal law and may have differing overtime-pay requirements. Depending on the applicable minimum wage, an employer may be able to set an hourly rate that, when coupled with overtime pay, compensates the employee at or slightly above his former salary.

4. Consider using a fluctuating workweek (FWW) salaried pay plan that provides for half-time pay after 40 hours of work in a workweek. The salary covers straight-time pay for all hours worked in the week. Therefore, the half-time overtime pay premium rate goes down as the number of overtime hours worked increases. An employee on a FWW pay plan is non-exempt, which requires an accurate record of actual hours worked to be kept. It is the “regular rate” per hour that fluctuates, and there is no requirement that the employee’s hours of work must fluctuate.

The half-time overtime premium that “reduces” as work hours became higher may be less expensive than using a regular hourly rate and paying time and a half after 40 hours. However, some practitioners have not favored FWW pay plans since there a variety of issues associated with this plan that require appropriate legal review before putting such a plan in place, the details of which are beyond the scope of this article and should only be utilized with the assistance of legal counsel.

5. Perhaps the closest method of payment to the typical weekly salary is to use a day-rate pay plan—a hybrid between a straight weekly salary for exempt employees and the FWW pay plan, which is also salary-based and requires half-time overtime pay.

The day-rate plan has the advantage of not having to determine whether an individual is truly exempt in performing his duties. It also avoids some of the downside of an FWW pay plan in that if an employee doesn’t work a day, then the employer doesn’t have to pay them for that day. However, it still provides additional incentive if the employee works an extra day, with a straight salary providing no additional incentive to the employee, and an FWW pay plan providing only a reducing half-time overtime rate. Again, the details of such a plan are somewhat complex and legal counsel should be consulted before implementing such a pay plan.

Keep in mind that some employees will not like being changed from salaried exempt to nonexempt for ego and status reasons, though such feelings usually diminish with the passage of time, while other employees will like getting overtime pay in whatever form it is provided. Bottom line: An employer can reduce its legal risks and come close to controlling its overall labor costs by considering and adjusting the method of payment that best suits the organization’s type and hours of work.