33: New Salary Level Test for Exempt Employees

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A massive transfer of income begins December 1, 2016.

The salary basis test says that 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. 

The salary level test says that the amount of the salary must meet a minimum specified amount.

For the executive, administrative, and professional employee exemption the salary level must be $455 per week or more. This doesn’t apply to outside sales employees, teachers, and employees practicing law or medicine.

On May 18th President Obama and Department of Labor Secretary Perez announced the publication of the DOL’s Final Rule updating the overtime regulations which, according to DOL, will automatically extend overtime pay protections to over 4 million workers within the first year of implementation.

The DOL says that this long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.

The Final Rule: 

  • Sets the standard salary level for the Executive, Administrative and Professional workers exemption at $913 per week, or $47,476 annually. Remember, it’s currently $455 per week or $23,660 per year. That’s a 100% increase.
  • It sets the total annual compensation requirement for highly compensated employees (HCE) to $134,004 from $100,000.
  • It amends the salary basis test to allow employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level, – this is new feature, and;
  • It establishes a mechanism for automatically updating the salary and compensation levels every three years.

Employers can use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level, let me explain a little about that.

In order to take this credit, the payments have to be made at least quarterly. Although, you can make a “catch-up” payment at the end of the year but I don’t have any details on the rules surrounding that.

As for highly compensated employees you’ll have to pay them the minimum salary of $913 per week, or $47,476 per year, and that amount may not be made up of non-discretionary bonuses and incentive payments, including commissions. However, you can use these payments to make up the rest of the new $134,004 minimum.

Non-discretionary bonuses, incentives and commissions are forms of compensation that you’ve promised to your employee, and are therefore expected. These are usually based on productivity, quality and/or quantity – generally based on a fixed formula – and could also include things like retention bonuses.

By contrast, discretionary bonuses are paid at your sole discretion and not part of any pre-announced standard. An example would be an unannounced bonus or spontaneous reward for a specific act.

What now?

Now that these new rules are published, you need to take steps to make sure that come December 1, 2016, you are compliant. You can bet that the lawyers will be ready.

The first step is to identify all your employees who are currently classified as exempt. Get out their job descriptions and make sure they are accurate. Apply the duties test to see if they pass. If not, you’ll need to reclassify them as nonexempt and start paying them over-time right away. To do that, you’ll need to start tracking their hours worked.

If they qualify as exempt under the duties test, look at weather or not they are paid non-discretionary bonus, incentive payments or commissions. If they do, you’ll be able to use those earnings to meet 10% of the new salary requirement, but you’ll have to make sure those earnings are paid at least quarterly.

Next, evaluate the financial impact and prepare for it. In some cases you’ll be doubling their salary. If that can’t be justified, you can leave their salary at the current level but you’ll have to convert them to non-exempt status, track their hours worked, and pay them overtime. This may very easily be the least expensive option.

And finally, notify your supervisors, managers and employees of the changes, and update your payroll system.

Conclusion:

The DOL has updated the salary level test for the Executive, Administrative and Professional workers exemption (otherwise known as the white collar exemption). This is one part of a three part test that determines weather or not an employee is entitled to overtime compensation.

Effective December 1, 2016, the standard salary level increases to $913 per week which is $47,476 annually. A 100% increase over the current level of $455 per week.

The total annual compensation requirement for highly compensated employees increases to $134,004 from $100,000.

This new rule amends the salary basis test to allow employers to use non-discretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the new standard salary level, and;

It establishes a mechanism for automatically updating the salary and compensation levels every three years.

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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