The White-Collar Exemption Rule: How Does It Affect Me?

The Final White-Collar Exemption Rule is set to take effect 1 December 2016. This rule will likely affect 4.2 million salaried or commissioned workers. The new rule applies to all employees, part-time and full-time. However, to be exempt, an employee must meet the duty test’s requirements and be paid more than $913 per week. Like any other rule, there are exceptions and exemptions.

If employees are paid a regular salary and meet the requirements of the Fair Labor Standards Act (FLSA), no further actions are required by the employer. If any employee works more than 40 hours in a week, they must be paid regular time, plus one-half (if the minimum wage is $15.00, then their overtime pay is $22.50 for each hour worked over 40) for every hour worked over 40 in a week.

New salary threshold requirements

The rule does not change, but the threshold at which salaried workers are paid overtime has changed. Now the minimum threshold for exemption from paying overtime is $913.00 a week or $47,476 a year, versus the $455 a week or $23,660 previous standard. This does not mean that an employer must raise all salaried workers’ pay to $47,476 a year. Likewise, for employees already earning more than $47,476 per year, nothing changes. These minimums are now scheduled to increase every three years rather than annually as the U.S. Department of Labor had suggested.

Management requirements

The requirements on management have not changed, how you manage your salaried employee’s schedule is still up to management. You can:

  • Increase employees’ salary to meet the new thresholds.
  • Reduce work hours to 40 a week or pay overtime.
  • Remove the exemption and pay overtime of one-and-a-half times regular salary. 
  • Reduce base salary to above minimum wage and permit a controlled number of overtime hours to keep payroll consistent.
  • Use a combination of these.

Before an employer raises the salary of an employee to keep from paying overtime, they should consider how the increased salary will affect expenses, not just now but in three years when that salary will rise again. Not just that, but if there is a challenge to the duties test and your employee is ruled not exempt, then you will be liable to pay time-and-a-half at the new salary of $913.00 a week.

Keep in mind these are the federal regulations and state regulations that are more favorable to the employee will take precedence. Therefore, if the state threshold is already $50,000, nothing changes.

However, if an employer wishes to exempt any of their employees from receiving overtime pay there are still rules and duty tests that apply. Exceptions apply specifically to other exemptions, such as lawyers, teachers, doctors, and those “highly compensated employees” who are paid more than $134,004. This is not all inclusive, there are other exemptions and exceptions.

Retail or service establishments’ commissioned employee’s exemption

Service and retail organizations are determined by the volume of sales on services, goods, or both, of which 75 percent is not for redistribution or resale and is accepted as a retail sale or service in the industry.

To meet the exemption rule, these establishments must designate a “representative” period for their employees. The representative period must be at least one month and not more than one year.

Those employees employed at the headquarters office within a retail chain or service enterprise, say a bookkeeper or instructor who serves various establishments is not included in this exemption. Since these employees are employed in headquarters.

Three requirements must be met:

  1. Employed in a service or retail organization, and
  2. the employee must be paid more than one-and-a-half times the minimum wage for each hour worked in a week where the employee worked more than 40 hours, and (if the minimum wage is $15.00, then the hourly wage must exceed $22.50 for each hour worked)
  3. more than 50 percent of the employee’s total earnings must have originated from commission sales or services (if the employee has a base salary of $200, the total with commission type sales or services must be more than $401).

If these conditions are not met in a “representative” period, then no exemption exist and regular overtime must be paid. The representative period must be at least one month but not more than one year. Tips are excluded from this exemption.

Accurate bookkeeping is a must under this exemption. Particularly, hours worked to substantiate wages paid, regular hours and overtime hours worked, and total earnings from commission type sales. When accurate bookkeeping is not available for inspection by the DOL’s WHD and a dispute or conflict arises, the WHD will likely support the claims of an employee with accurate records of hours worked. Therefore, the employer could be liable to pay a full one-and-a-half times the minimum wage for every week in which the employee worked more than 40 hours, plus any penalty.

Commissions and bonuses: discretionary & non-discretionary

Up to 10 percent of the standard salary to meet thresholds can occur from a non-discretionary bonus, an incentive payment, and/or a commission, paid quarterly.

  • Discretionary bonuses or commissions are spur-of-the-moment or unannounced.
  • Non-discretionary bonuses are written into contracts or employee handbook. Generally, these are announced bonuses.