Question: I read that the Department of Labor (“DOL”) recently changed the federal overtime laws. I operate a local business with 50-60 employees, and most of my employees are non-exempt and are paid hourly. I also have several exempt salaried managers that work between 35 and 55 hours per week. I offer fairly competitive salaries but none of my managers make more than $45,000 per year. Will the new federal overtime law affect my business?
Answer: Yes, the DOL’s “Final Rule” will directly impact your business because the new salary requirement for an exempt professional, executive, or administrative employee will be $47,476 annually beginning December 1, 2016.
As most California employers know, executive, administrative, and professional employees are exempt from overtime laws if they meet a “duties test” and a “salary test.” The duties test was not changed by the DOL Final Rule. Currently, the salary test is met if the employee is paid an annual salary of at least $41,600, which is equal to two times the California minimum wage for full time work. The California minimum wage is currently $10 an hour, and for employers with 26 or more employees, it will increase to $10.50 an hour beginning on January 1, 2017, $11.00 an hour beginning on January 1, 2018, and $12.00 an hour beginning on January 1, 2019. The new federal required annual minimum salary of $47,476 for an exempt executive, administrative, or professional employee will apply to your business until January 1, 2019, when the California minimum salary requirement of $49,920 will surpass the federal salary minimum.
As a California employer, if your exempt employees satisfy the duties test for the executive, administrative, or professional exemption, you will need to increase their pay to at least $47,476 annually starting December 1, 2016 in order to keep their exempt status intact. If you increase pay to maintain the exemption, the entire workweek that includes December 1, 2016 must meet the salary threshold, i.e., if your workweek is Monday through Sunday, salaries must be increased effective Monday, November 28, 2016.
Some employers may decide that they cannot afford to increase the salaries of their exempt executive, administrative, and professional employees. In that case, the employees will need to be reclassified as non-exempt, and they will be paid hourly for all hours worked. These newly non-exempt employees will need to be trained to clock in and out, take meal and rest periods, and they must be paid overtime for any work in excess of 8 hours per day or 40 hours per week. If the managers are reclassified as non-exempt, you will need to determine if you will allow them to work overtime, or if you will limit their work hours and potentially hire additional employees as necessary.
It is also important to have a communication plan to inform your employees of the reasons for re-classification. Morale problems may arise if one manager remains exempt, but another is re-classified as non-exempt and paid hourly. Regardless of your decisions regarding compliance with the new DOL Final Rule, it is important to start planning now and be prepared to handle the economic, operational, and morale changes that are likely to occur as a result of the new DOL rule.