Are Your Exempt Employees Paid Enough?

Almost every business has workers who are classified as exempt from the minimum wage and overtime requirements of the federal Fair Labor Standards Act. The most common exemptions, often referred to as the “white collar” exemptions, are for executive, administrative and professional (EAP) employees.

For the past 15 years, the minimum salary for such employees has been $455 per week ($23,660 annualized). Effective January 1, however, the U.S. Department of Labor substantially increased that minimum, to $684 per week, or $35,568 per year.

Examples of positions likely affected by the new rule include line managers for retailers and quick service restaurants and office professionals working for nonprofit organizations — roles in which salaries have often hovered in the upper $20,000s and low $30,000s. For some workers, this new rule means a salary increase; for others, it means they are now eligible for overtime pay. Either way, it’s important for employers to ensure compliance with DOL rules to avoid potentially costly litigation and liability for unpaid overtime.

Some Bonuses Count toward Salary
Employers may use nondiscretionary bonuses (such as those tied to productivity or profitability) and incentive payments, including commissions, to satisfy up to 10 percent ($3,556.80) of the minimum salary. The bonuses or incentive payments must be paid at least annually. If an employee does not earn enough in bonuses or incentives in a given year to retain exempt status, the employer may make a “catch-up” payment within one pay period after the end of the compensation year.

Caution: ‘Salaried’ Does Not Equal ‘Exempt’
It is a common misperception that all salaried employees are exempt from eligibility for overtime pay. Salary level is only one aspect of exempt status. The employee also must meet the duties test for at least one of the exemptions or a combined exemption. The duties tests did not change, so the existing criteria continue to guide classification decisions. The administrative exemption is often the most difficult to apply because the criteria are the most subjective.

Pay Levels for Other Exemptions
Computer professionals continue to be the one type of professional employee that may be paid hourly, and the minimum hourly rate remains unchanged at $27.63. For those paid a salary, however, the salary must meet or exceed the new minimum.

The DOL also provides an exemption for highly compensated employees (HCE). For this to apply, the employee must customarily and regularly perform at least one of the exempt duties of an EAP employee. The updated rule raises the total annual compensation level for HCEs from $100,000 to $107,432 per year, with at least $684 per week, or $35,568 per year, being paid in a fixed salary. The remaining compensation may be paid as additional salary or in other ways, such as in commissions, bonuses or incentives.

The Bottom Line for Businesses
This rule change provides a perfect opportunity to review whether exempt EAP employees who have been making less than $35,568 per year are properly classified in the first instance. For those who are, employers can come into compliance by increasing employees’ salaries. Of course, increasing the pay of one employee or a group of employees can have a ripple effect on other employees who otherwise would be unaffected by the changes in the law.

But significant salary increases may not fit a company’s budget, or they may not be justified by the market for a particular role. A company also may determine that an employee’s current duties do not qualify for exempt status. In situations like these, the employee’s position will need to be reclassified as non-exempt, making the employee eligible for overtime pay for all hours worked beyond 40 in a workweek.

As part of reclassification, the company may want to convert an employee’s pay to an hourly rate (to simplify calculation of overtime), and the employee will need to track work hours and follow the company’s timekeeping policies (including any rules related to approval for overtime work). Employers also should be mindful that employee benefits, such as paid time off, may be affected if programs or plans are different for exempt and non-exempt employees.

Noncompliance with salary and overtime rules can lead to DOL investigations, private litigation or both, with the government or employees seeking liquidated (double) damages and attorneys’ fees. To avoid this outcome, businesses should work with human resources professionals and legal counsel to help evaluate a company’s classification decisions, identify any potential risks, and craft communications to employees whose positions will be reclassified.

Jill Chasson is an attorney with Coppersmith Brockelman in Phoenix. She focuses on helping businesses of all sizes in a variety of industries with their employment law needs.

[Did you know: Arizona doesn’t have its own overtime pay requirement, but it does have a minimum wage much higher than the federal minimum: $12 per hour as of 1/1/2020, compared to $7.25/hour under federal law.]