Stress Relief from the Drama of the New Wage Regulations

The news is blaring one warning and seminar and webinar after another on the new federal wage and hour regulations, which recently went into place. They will be enforced as of December 1, 2016. But the reality is that planning and re-thinking the test for exempt employees (the ones who don’t get overtime, that is) can lessen the impact.

First, the test . . . it used to be more of a two-part test; no one thought about the salary level minimum much, in part because it was so low. (We’re not saying it needed to be more than doubled though!) Even then folks got into trouble. Some thought you could just put someone on salary and, voila, no need for overtime. That thinking forgot about the second part of the test – was the employee doing exempt work. Others got into trouble by making deductions from pay from otherwise exempt employees, forgetting that even though the person was doing exempt work they needed to meet the “salary test,” the test that boiled down to the employee needing to get the same weekly pay “regardless of the quantity or quality of hours worked.” The violation might happen by deducting hours from pay when the employee left work at 2 p.m. or deductions for days when the employee showed up for an hour and left to go home sick.

So now it is really a three part test. Here are the three parts:

  1. The employee must be performing exempt work, as defined by the regulators. For example, your bookkeeper is not doing exempt work. Your general manager probably is unless their decisions have to all be run by you for approval.
  2. The employee must be paid in a way that meets the “salary test.” There are deductions from pay that can be done but the bottom line is to avoid any deductions from the weekly paycheck unless you’ve made sure they’re ok.
  3. The employee must be paid a minimum level of salary. That used to be $455 per week or $23,660 a year. Now it is $913 a week ($47,476 a year). This is the part of the test that just had the big change.

An employee must meet ALL THREE tests to be exempt, that is, not be owed overtime for any hours over 40 each week. Two out of three is not good enough. And although the new minimum salary level seems high, paying that salary alone is not enough. The employee has to be doing exempt type work AND meeting the “salary test” AND receiving the minimum level of pay of $913 a week ($47,476 a year).

Second, how do you plan what to do? The easiest thing to do is to make just about everyone hourly and pay overtime – easiest in terms of not having to worry about the rules and if you’re meeting the various tests. This approach does mean that budgeting can be more difficult if you end up with lots of overtime. It can also affect morale and employee flexibility. If someone you have is currently exempt and they are close to the new $47,476 a year, then think about just upping their salary a bit more. If they are not, before making a decision, consider having all your exempt employees keeping track of their hours for the next six months so that you can make a more informed decision. If an employee, even if exempt, is working close to 40 hours a week, paying them for overtime will not be a huge expense and it may be cheaper to pay them by the hour and for what occasional overtime they work. (You otherwise need to pay them over $47k a year.) Exempt employees may not be happy about having to track their hours, but you need the information about how much each person is actually working and the explanation as to why you’re doing the tracking makes sense. It isn’t because they are being “demoted to an hourly position” but because you are trying to figure out how to plan for these new rules.

The effect on morale is important. One of the downsides to moving an employee from exempt to hourly is that the employee may perceive the change as a demotion of sorts and some will want the greater flexibility of salaried status. Now is a great time to poll employees on what they value. Not only does that make them feel more part of the process but you may learn critical information for what needs to be done to keep your current talent pool and reduce turnover. If flexibility is key, but the person does not do exempt type work and/or they don’t earn enough to meet the new minimums, you may be able to come up with an hourly pay scheme that also lets them have some timing flexibility, as long as they clock in and out. Getting everyone used to keeping track of their hours while you evaluate what will work is going to earn some blowback but best now while the issue is front and center in the news and it can be addressed as investigatory. It need not be viewed as any one person being treated “like an hourly” but as an evaluation of what everyone’s needs are. And such an evaluation is helpful for a company 360 degree view: are folks really working the hours they say/it seems, are some folks way more productive than others and perhaps in need of recognition while others may fit better into an hourly format, and is everyone, hourly or not, really aware of just how much time they are working.

Finally, thanks to both the federal and state Departments of Labor, there is lots of additional information out there about the new regulations. Here are the links:

This article is not legal advice but should be considered as general guidance in the area of employment and corporate law. Rebecca Webber is an employment attorney; others at the firm handle business and other matters. You can contact us at 784-3200 (telephone). Skelton Taintor & Abbott is a full service law firm providing legal services to individuals, companies, and municipalities throughout Maine. It has been in operation since its founding in 1853.