Should You Reclassify Your Salaried Employees?
How to Decide if Overtime Will Be a Burden for Your Business
It’s almost the holiday season, which could mean longer hours for your employees. So what will you do when the standard overtime salary threshold jumps from $23,660 to $47,376 on December 1? Will your salaried employees be eligible for time-and-a-half? It’s time to find out. To minimize overtime costs, you’ll also want to look closely at whether these employees should be reclassified.
Confirm that your employees meet exemption rulings.
Before you reclassify anyone, you should make sure that your employees are actually exempt under the new ruling. Don’t assume. An employee’s actual duties are what matters here, not their job title.
According to the federal ruling, there are three criteria to consider:
(1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”);
(2) the amount of salary paid must meet a minimum specified amount (“salary level test”); and
(3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).
Check job duties meet requirements.
The “duties test” is different for each of these levels. These positions must perform the following duties to be exempt from overtime:
- Executive. These employees serve key leadership and management roles, directing the work of at least two or more employees. They also need to have the authority or a strong voice in hiring and promoting employees.
- Administrative. These employees primarily work on office or non-manual work directly related to management or general business operations. Their job requires them to “exercise discretion and independent judgment with respect to matters of significance.”
- Professional. Professional employees require knowledge of an “advanced type” or skill. If they work in a field of science or learning, their work is “predominantly intellectual in character” and also requires “discretion and judgment.” They can also qualify if their work requires “invention, imagination, originality or talent in a recognized field or artistic or creative endeavor.”
Consider bonuses and incentives.
The new federal ruling lets employees count bonuses and incentives as part of the total salary, provided they don’t make up more than 10 percent of the salary.
Such payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, the Final Rule requires such payments to be paid on a quarterly or more frequent basis and permits the employer to make a “catch-up” payment.
If you have employees who regularly receive these incentives, see whether their total compensation with these incentives surpasses the salary threshold of $47,376. If so, they will remain exempt under the new law. Your time and attendance software should be set up to flag warnings if they are falling below this threshold, however, or you could unknowingly dip below compliance levels.
Check state laws.
You absolutely need to comply with federal laws, but state laws can sometimes be more restrictive. Make sure you are familiar with any additional state laws governing employee classification.
If you find any errors, correct them now. If you suddenly realize that an employee should or shouldn’t have been exempt, address it as soon as possible. The employee might have grounds for a potential lawsuit if they should have already been receiving overtime, so be conscious of this as well.
Consider 3 basic reclassification options.
If you have employees who meet the duties test outlined above but not the salary requirements, you will need to decide how to compensate them moving forward. There are three options you can choose.
Shift nonexempt employees from salaried to hourly.
This is a difficult change to make, but it could be right for your business. Calculate current salaried employees out into their hourly grade, and switch them over. Fair warning: You may alienate people when you do this, so make sure you have a communication plan in place. Then make sure you make these upgrades in your time tracking software.
Pay salary overtime.
Some salaried workers don’t regularly work overtime. If you keep these employees on salary, you’ll have to pay overtime when they do. They’ll need to start tracking their time if you decide to go this route. Make sure you prepare them for this transition, and have time tracking software in place.
Increase salary to keep them exempt.
Are they close to the new salary threshold? It might be easier to increase their salary so they are once again exempt. This is a good option for employees that you know will incur overtime pay that can’t be avoided. Be aware that these salary increases can have a negative impact on senior staff if their pay grades don’t also increase.
Communicate with your employees and get time tracking in order.
If you need to make changes to your employees’ statuses, the time is now. The December 1 deadline is fast approaching, and the federal government will not be providing an extension. While TMS can’t provide legal advice, we can help ensure your time and attendance software is calibrated for these changes. If you need help, please get in touch!