A few weeks ago we talked about the rules surrounding the definition of “exempt employees.” One of the rules was the minimum pay required to consider someone as “salaried exempt.” Previously it was a set at $35,568 per year (or $684 per week). If you read that number and were a little surprised at how low it is, you’re not alone…we were, too, the first time we saw it. But while that number does read low, many salaried exempt employees are in roles like outside sales where there is the potential to make tens of thousands more in commissions.
Recently, the Department of Labor has proposed updating and revising the regulations issued under the Fair Labor Standards Act. This is the law that governs the exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees. One of the most significant proposed changes is to increase the standard salary level to the “35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South)—$1,059 per week ($55,068 annually for a full-year worker)—and increasing the highly compensated employee total annual compensation threshold to the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally ($143,988).”
The rule change was submitted to the Federal Register in early September and there is a 60 day comment period when the public do so, although from past experience, it is unlikely to change anything.
Key Takeaways
It is estimated that this proposed salary threshold change will result in as many as 3.4 million workers either becoming eligible for overtime or receiving pay increases in order to remain in the exempt status.
Currently the regulations allow for employers to use non-discretionary bonuses and incentives, including commissions, in an amount up to 10 percent of the standard or special salary level for exemptions.
The Highly Compensated Employee threshold is also increasing, from $107,432 per year to $143,988 per year, and $1,059 of that must be paid weekly as “salary.” This proposed amount uses the 85th percentile of full-time salaried workers nationwide.
At this time, special salary levels are used for some U.S. territories. The proposed rule would bring all territories except American Samoa in line with the regular national rules. American Samoa would keep its special rate until minimum wage reaches the federal minimum.
If this rule does take effect, it will no doubt be challenged in court…and could be thrown out, as Obama’s 2016 overtime rule was shortly before it was to take effect. The Trump administration instituted a new rule in January 2020 and it is currently being challenged.
The Department of Labor has also proposed to make automatic updates to the salary thresholds every three years, so this is unlikely to be a one-time thing.
What Should You Do?
The first thing you should do is review the salary ranges within your organization that are currently in the exempt category. Some of them may meet the new threshold and some will not. You will need to decide what to do about those that do not.
You can reclassify employees as non-exempt, but if you do so, consider alternate means of compensation and incentives to counter the employees’ loss of exempt status.
If you do not already track hours in your company, and you have employees that are shifting to non-exempt status, it’s time to start doing so. Make sure your hourly tracking is easy to use—so the employees will pick up on it quickly—and accurate—as a way to protect your organization in the event of an audit.
If you have more questions on this, reach out and give us a call at 423-207-2497.
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