Salaried Employee Compensation Rules get a Major Makeover

In June of 1938, as the world-wide financial upheaval of the Great Depression began to come to a close, President Franklin D. Roosevelt signed the Fair Labor Standards Act (FLSA) which established minimum wage standards throughout the United States. It was the FLSA that also established the 40-hour work week for non-salaried employees.

On December 1st of this year, the first major changes to the FLSA in nearly 80 years will go into effect. The changes focus primarily on salaried employees, but because the revisions may require some salaried employees to be reclassified as hourly workers, virtually every business that has employees will be affected. If you own a business, now is the time to educate yourself about the changes to the FLSA, and to begin to evaluate your current compensation models to ensure they comply with the new rules.

What’s Different?

  • Minimum Compensation for Salaried Workers: The most significant change that will go into effect in December, when it will more than double, is the standard compensation level for salaried employees. The current weekly level is $455 ($23,669 per year); the new amount will be $913 ($47,476 per year). For seasonal businesses, it’s important to note that it’s the weekly minimum that must be met rather than the annual.
  • Minimum Salary for ‘Highly Compensated’ Employees: The increase in minimum annual income for highly compensated employees is less significant. The current minimum is $100,000 per year; the new threshold will be $134,014.
  • Compensation Updates Required: Beginning on December 1st, businesses will need to have a process in place for automatically updating salary levels every three years.
  • Bonuses and Commissions Will Count: When the new law goes into effect, employers will be able to include nondiscretionary bonuses and commissions to satisfy up to 10% percent of the new salary level. A ‘nondiscretionary bonus’ means one that is structured and prearranged, and awarded after achieving a goal such as increased productivity or honoring an employee’s longevity. A ‘discretionary bonus’ would be something such as a holiday bonus that is unanticipated or unplanned. Bonuses must be paid quarterly, or more frequently, for them to count toward the minimum level.

What Stays the Same?

  • The “Duty Test”: While the “duty test” will remain in place unchanged, it may receive a renewed level of scrutiny after the changes go into effect. A “duty test” is what establishes whether an employee’s duties and responsibilities qualify them for an exemption from both minimum wage and overtime pay. Employees must be working as a bona fide executive, administrative professional or outside sales employee. Certain computer employees may also be exempted. Each of these categories has very specific tests outlined by the IRS that must be met in order to qualify for the exemption. It is important to note that in order to be exempt from the minimum wage and overtime regulations, the salary must be at least $913 per week and the position must meet the requirements of one of the above classifications.

BizChecks Payroll recommends that businesses immediately begin reviewing any employees classified as exempt. Job descriptions for exempt employees should clearly outline those duties that specifically qualify a position as exempt. While reclassifying certain employees as nonexempt may be the simplest way to address the upcoming changes to the FLSA, employers should be careful in how they do this as the potential exists for workers to argue that they had been misclassified in the past and are now owed retroactive overtime wages.

If you have questions regarding the new FLSA regulations, you may find these FAQs provided by the Department of Labor helpful. Please call us if we can be of assistance or answer any questions.

Department of Labor FAQ: