Matters Column

Mom and pop should study up on new OT rules

August 12, 2016
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The U.S. Department of Labor has released its long-awaited final regulations governing the “white collar” exemption for executive, administrative and professional employees under the Fair Labor Standards Act. Employers have until Dec. 1 to comply.

The FLSA requires employers to pay non-exempt employees one and a half times their regular rate of pay for every hour worked in excess of 40 hours in a designated workweek. Employers must also keep records of hours worked and wages paid to non-exempt employees.

The act exempts certain employees from overtime pay. The most commonly used exemptions are executive, administrative and professional — commonly referred to as the white-collar exemptions. In order for employees to fall within one of the white collar exemptions, they must perform certain executive, administrative, or professional duties (the “duties” test) and earn a minimum weekly salary.

FLSA exemptions for family-owned businesses: The FLSA contains another exemption that may allow some family-owned businesses to avoid paying overtime. The act excludes from its coverage any establishment that has as its only “regular” employees the owner, his or her parents, spouse, children or other members of the immediate family. This is frequently referred to as the mom-and-pop exclusion. “Other members of the immediate family” include siblings, grandchildren, grandparents and in-laws but not distant relatives from separate households.

When a family-owned business employs non-family members, however, the mom-and-pop exclusion does not apply. That is why it is still critical for a family-owned business to be familiar with the new DOL regulations.

What’s changed? The most significant change made by the DOL’s final regulations is they increase the minimum weekly salary threshold exempting an employee from overtime pay from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). An employer may permit up to 10 percent of the salary level to come from non-discretionary bonuses, incentive payments and commissions paid at least quarterly.

Additionally, the DOL has taken the unprecedented step of having the minimum salary level adjusted every three years beginning Jan. 1, 2020, based on future wage growth. As a result, employers will have to periodically determine whether employees continue to earn a sufficient annual salary to potentially remain exempt.

The DOL did not make any changes to the duties test, but employers should still determine whether employees are performing duties that qualify them as exempt and — if necessary — draft or revise their job descriptions to make sure they accurately reflect employees’ existing job duties.

What do the proposed FLSA regulations mean for employers? The increased salary threshold doubles the prior threshold and will have a substantial impact on employers that will have to pay additional wages to some workers for the duties they currently perform. The DOL estimates that 4.2 million workers will no longer qualify as being exempt from overtime pay.

In the event an employee is converted from exempt to non-exempt status, an employer will have an additional burden of maintaining records of all hours worked and wages paid to its non-exempt employees. The penalties for not complying with the FLSA include payment of back wages for up to three years if there is a willful violation, civil penalties, liquidated damages, attorney fees and court costs. Therefore it is critically important that employers use the time they have been given to develop an effective strategy for ensuring proper payment of overtime and implementing effective record-keeping.

What should employers do now? Employers should undertake a complete assessment of all positions they currently treat as exempt to determine whether they will be impacted.

In particular, positions currently classified as exempt that pay less than $47,476 a year should be assessed to determine whether they need to be reclassified as non-exempt (and eligible for overtime pay) or qualify for another exemption. Employers also will likely need to budget for increased salaries and/or increased overtime costs in the future.

Possible options for complying with the new regulations include:

Increasing the salaries of exempt employees to the new minimum salary threshold. As part of the salary increase, employers may consider giving exempt employees additional responsibilities to account for paying them a higher salary.

Reclassifying exempt employees as non-exempt and paying them an hourly wage rate (or reduced salary) while accounting for their ability to receive potential overtime pay at time and a half for all hours worked over 40 in a workweek.

Using a Belo Plan for employees who cannot control their weekly hours (e.g., due to employee call-ins, emergencies, etc.). A Belo Plan permits a fixed payment when the employee’s duties necessitate irregular work hours both above and below 40 hours and total wages would vary widely from week to week if computed on an hourly-rate basis.

Using a fixed salary for a fluctuating workweek. In order to do so, an employer must satisfy each of these items: 1) Pay a fixed salary each week that does not vary based on the number of hours worked by an employee. 2) Share with the employee a “clear mutual understanding” that the employer will pay the fixed salary (apart from the overtime premium) regardless of the number of hours worked. 3) Set the fixed salary sufficiently large to ensure that fluctuating-workweek employees earn more than the minimum wage. 4) Show that the employee’s hours actually fluctuate from week to week above and below 40 hours. Employers using this method must ensure that they pay half-time of the regular rate for all hours worked in excess of 40 in any workweek.

Changing paid time off and other benefit plans as necessary for employees who are reclassified as non-exempt.

Restructuring operations, staffing levels and/or scheduling to mitigate exposure to possible overtime pay.

Changing job duties of employees who satisfy the new salary threshold, as necessary, to continue to meet the duties test.

Implementing timekeeping and recordkeeping as needed if employees are reclassified as non-exempt employees.

Implementing, reviewing and revising policies regarding working approved overtime as necessary to minimize overtime obligations and provide clear expectations on when overtime can be worked. Employers will also have to assess how to address non-exempt employees’ travel time and use of smartphones, e-mail and computers to perform duties outside of their scheduled working hours. 

Training supervisors to effectively manage schedules and follow timekeeping practices for those employees reclassified as non-exempt. 

Training reclassified employees to track their work time and educating them on policies concerning approval of overtime.

Developing a communications plan to explain changes to employees and handle morale issues that may result from the change.

Since many options exist in response to the new DOL regulations, employers are encouraged to act now to select the most appropriate option(s) for compliance with the new DOL regulations while providing the least detrimental financial and operational impact to their business. 

Kurt M. Graham of Mika Meyers PLC specializes in advising private- and public-sector employers, including school districts and municipalities, with regulatory compliance issues. He can be reached at 616-632-8021 or

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