September 2016 Meeting: Exempt and Non-exempt Employees: Finding the Right Staffing and Compensation Strategy for your Organization

Date: September 29, 2016

December 1, 2016, the new DOL regulations governing non-exempt employee compensation go into effect.  We first reviewed these changes last May.  We decided to dive in deeper and review how our employees should be classified as well as how well we apply the exempt duties test in each of our organizations.

How does one analyze and develop a solid staffing and compensation strategy around exempt and non-exempt employees?

The presentation began with a quick overview of FLSA overtime requirements, focusing on the 2004 regulations & the duties tests for the categories of white-collar employees exempt from overtime, namely: executive, administrative, professional, outside sales, and computer professionals. To qualify under the “professional” category, a job needs to require an advanced degree beyond a bachelor’s (such as an MD, JD, etc.), reflected in its scope and level of responsibilities. There was discussion about when a master’s degree would qualify. We were cautioned that the “administrative” exemption has been prone to misuse. To qualify for this exemption, an employee needs to exercise independent judgment and discretion with respect to “matters of significance,” such as strategy, establishing budgets, hiring & firing…. The category does not, for example, usually extend to administrative assistants. It might, however, be appropriate for a CFO or Finance Director, even one without an M.B.A.  The duties and extent of independent authority and discretion are determinative.

This was followed by a summary of the Department of Labor’s new regulations for overtime eligibility, which go into effect December 1, 2016. The most immediately obvious of the changes are higher salary thresholds for overtime exemption and the “highly compensated employee” test. To be considered for exempt status, an employee will need to draw a salary of at least $913 per week ($47,476 annually), a threshold more than double the current cutoff. In addition, the employee would need to pass the duties test–as described above–which remains unchanged. The annual salary threshold for highly compensated employees, who are automatically exempt from overtime rules, will rise to $134,004. The new rules also set forth a mechanism for the thresholds to be adjusted every three years, and include provisions for counting certain bonuses and incentive pay as part of qualifying salary.

There are two important features of the new $913 threshold. First, an employee must earn at least $913 every week, not merely on average over the course of the year. Secondly, the floor applies to the employee’s actual salary, not prorated for hours worked. Whether an employee works 20 hours a week or 40, she must earn $913/week or more to meet the new salary test.

Up to 10% of the salary counting toward the minimum can take the form of nondiscretionary bonuses, incentive pay, and commissions. To qualify, any such compensation must be paid out at least quarterly. An annual discretionary bonus, for example, would fail to qualify on two counts.

There was some discussion about the nonprofit exemption for organizations and individuals. It does not cover the vast majority of cases, because to apply, both the Massachusetts organizational test and federal enterprise or individual tests must be met. The individual test is quite restrictive, due to a broad interpretation of “interstate commerce.”

To comply with the new regulations, an employer might consider a number of options regarding employees who currently earn less than $913/week, including:
Raise salaries to meet or exceed the threshold
Is someone earning close to that amount already?
Are they earning bonuses or commissions that get them close?
Would they otherwise be logging a large amount of overtime hours?
Reclassify them as non-exempt, and pay time-and-a-half for overtime
Are they earning well below the threshold?
Would raising their salaries result in problematic pay compression?
Are they unlikely to log overtime?

Organizations are adapting by reclassifying employees as non-exempt, but adjusting wages so that employee’s total pay, including overtime, would stay about the same.

It was noted that non-exempt salaried employees may still be paid on a salaried rather than hourly wage basis, as long as they are paid overtime wages for any hours over 40 per week and agree to the arrangement. So an employee who works variable hours can be a salaried non-exempt employee so long as the overall salary satisfies minimum wage for all hours worked and hourly overtime would be applied when the hours worked exceeded 40. However in that case, it would be strongly advised to obtain a written agreement from the employee (such as acceptance of an offer letter) specifying that they are to be paid on a salaried basis.

Above all, these new rules are an excellent opportunity to clean house: do a thorough audit of actual current job duties and job descriptions; track hours worked; review policies on work hours, scheduling and telecommuting; etc. If you need to change your compensation structure or policies, the DOL rules will serve as a concrete starting point for communicating changes to employees.


Presenter: Elizabeth Levine, Esq. has significant non-profit experience and will lead a discussion of these and related issues.  Counsel in Goulston & Storr’s litigation practice, her practice focuses on proactively counseling employers with respect to personnel policies and other employment law related matters as well as defending organizations in litigation.