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Tuesday, November 22, 2016

Overtime Rules Are Scheduled to Change in December

The U.S. Department of Labor's (DOL) higher income requirement for the "white collar exemption" from overtime is scheduled to kick in December 1. Paying a "nondiscretionary" bonus to employees at least on a quarterly basis can, in effect, lower the minimum salary you'll need to pay them and still have those employees counted as exempt for overtime purposes, according to a fact sheet issued by the DOL recently. However, if employees don't earn that bonus, you could fall short and they would be entitled to overtime pay for any overtime logged during the prior quarter.

Could the New Overtime Rules Be Rescinded or Revised?
As most employers know by now, the new overtime rules are scheduled to take effect on December 1 and an estimated 4.2 million employees will become eligible to benefit from them. Is there any chance the rules might not happen? A challenge is brewing in a federal court in Texas and business groups are hoping the incoming Trump Administration will step in and reduce or eliminate the burden on employers, but the December 1 deadline stands.

The Federal Lawsuit
Earlier this year, two lawsuits were filed in a federal court to challenge the new overtime rules. One lawsuit was filed by 21 state attorney generals and one was filed by the U.S. Chamber of Commerce and other business groups. The two lawsuits have now been combined and will be heard in the U.S. District Court for the Eastern District of Texas.

It's possible that the judge assigned to the case could issue an injunction before December 1.

How Does the President-Elect Feel?
Some business groups have expressed hope that After President-elect Donald Trump takes office on January 20, 2017, the U.S. Labor Secretary he appoints will roll back the overtime rules. Trump said on the campaign trail that he would like to see an exemption for small businesses.

However, the new administration can't just quickly undo the rules. It would have to follow a rule-making process that could take months, or even years. It's possible Congress could pass legislation that limits the rules, phases them in over time or eliminates the automatic inflation adjustment to the salary threshold that's currently scheduled to occur every three years.

The new overtime rules weren't a focus of the presidential campaign so it's not clear whether the new administration sees them as a priority. Of course, once they go into effect, it will be difficult to take overtime pay away from employees.

At this point, it seems unlikely that the new overtime rules won't go forward as scheduled. The bottom line is that businesses must be prepared to begin complying on December 1. We'll keep you apprised of any changes.
That is, unless you take advantage of a new escape hatch created by the DOL.

Back on May 23, 2016, the DOL unveiled its regulations updating the exempt status minimum income standards for employees "employed as bona fide executive, administrative, professional, and outside sales employees." Beginning December 1, a new higher minimum income threshold applies ($913 per week or $47,476 annually), which will be inflation-adjusted every three years). In addition, employees 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."

But for the first time, up to 10% of the minimum income can be comprised of nondiscretionary bonuses, incentive payments, and commissions paid quarterly, or more frequently. Bonuses can be tied to productivity and profitability, either for individual or group performance. Retention bonuses also count. The key is that bonus amounts must be "based on a predetermined formula."

Discretionary vs. Nondiscretionary
A discretionary bonus, in contrast, is defined as one in which the employer "retains discretion both as to the fact of payment, and the amount until a time quite close to the end of the period for which the bonus is paid."

With the income thresholds for non-highly compensated employees (NHCEs), an employee averaging at least $10,679 in salary per quarter could still exceed the minimum income threshold for exempt status (which translates to $11,869 quarterly) if he or she earned at least a 10% bonus (that is, $1,190).

What if, based on the predetermined formula, the bonus fell short of the amount needed to bring the employee's quarterly pay up to $11,869? The new DOL rules allow for that contingency: a "catch-up payment."

Catch-Up Payments Defined
If a white collar employee's combined salary and nondiscretionary bonuses totaled only, for example, $10,000, you could add $1,869 to his or her first paycheck of the next pay period to bring the quarterly total to $11,869, and satisfy the minimum income standard.

The practical significance of all this is that you can, within the limits described, build more incentive into employees' pay.
However, your hands might be tied to some degree if the employee in this example had worked a lot of overtime during the quarter, but failed to earn the nondiscretionary bonus. To protect the employee's exempt status, you'd still want to make a catch-up payment even if the worker's performance was sub-par. Just be careful not to set pay at levels that would require the employee to earn the maximum bonus every time to qualify as exempt.

Rules for the Highly Compensated
The DOL's fact sheet also explains that different rules apply to highly compensated employees (HCEs). The significance of HCE status is that employees with that status don't have to satisfy as many qualifications as NCHEs to be deemed exempt. The primary qualification for HCE status is, not surprisingly, based on income.

Under the new thresholds that are scheduled to take effect in December, over the course of a year HCEs must earn at least $134,004 (including nondiscretionary bonuses). They have the same minimum weekly earnings standard as NCHEs — that is, $913, even though the average for the entire year will have to be much higher — $2,577 to be specific.

The difference between the treatment of NCHEs and HCEs with respect to the role of bonus payments is that HCEs' weekly base compensation cannot fall below the $913 per week. As explained by the DOL, "While nondiscretionary bonuses and incentive payments (including commissions) may be counted toward the HCE total annual compensation requirement, the HCE test does not allow employers to credit these payment forms towards the standard salary level requirement." That is, the same $913 amount applicable to NCHEs.

Using an extreme example for illustrative purposes, an employee who satisfies the white collar exemption "minimal duties test" and earns a $47,476 salary can still maintain HCE status if his or her nondiscretionary bonuses for the year, when added to the $47,476, exceed the $134,004 minimum. That would require an unlikely situation of bonuses totaling at least $86,528, which represents 65% of that employee's total earnings.
The DOL's position on bonuses in relation to the white collar exemption gives employers some latitude in meeting the new higher standards, but requires careful compensation planning. Compensation consultants help employers balance fixed and incentive-based pay components to achieve both motivational and regulatory compliance goals

Contact us for all your Insurance needs! (321)725-1620 
Bob Lancaster Insurance

Serving Florida since 1964

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