The federal Department of Labor (DOL) has released proposed changes to the overtime regulations. These proposed changes would increase the salary level for exemption from overtime. In Part 1 of this article, we review the changes in salary levels for executive, administrative, and professional employees, as well as for computer professionals and highly compensated employees.

Here we provide more details of the proposed regulations, including fee payments, rules for computing compensation, the impact of additional compensation (e.g. commissions or bonuses) on exempt status, and rules for educational establishments. We also provide tips on what employers can do to help avoid compliance issues in the wake of the proposed rules.

Fee Basis

Administrative and professional employees may be paid on a fee basis rather than on a salary basis. According to the proposed regulations, to determine whether the fee payment meets the minimum amount of salary required for exemption, the amount paid to the employee will be tested by determining the time worked on the job and whether the fee payment is at a rate that would amount to at least the minimum required salary per week if the employee worked 40 hours.

For example, if the salary level were $921 per week, an artist paid $500 for a picture that took 20 hours to complete meets the minimum salary requirement for exemption, since earnings at this rate would yield the artist $1000 if 40 hours were worked.

Educational establishments

Employees whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment or department will be exempt if they are compensated on a salary or fee basis of at least $921 per week (or $774 per week, if employed in American Samoa by employers other than the federal government), exclusive of board, lodging or other facilities; or on a salary basis which is at least equal to the entrance salary for teachers in the educational establishment in which they are employed.

Additional compensation

An employer may provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly-required amount paid on a salary basis.

Thus under the proposed regulations, an exempt employee guaranteed at least $921 each week paid on a salary basis may also receive additional compensation of a one percent commission on sales. An exempt employee also may receive a percentage of the sales or profits of the employer if the employment arrangement also includes a guarantee of at least $921 each week paid on a salary basis.

Similarly, the exemption is not lost if an exempt employee who is guaranteed at least $921 each week paid on a salary basis also receives additional compensation based on hours worked for work beyond the normal workweek.

Such additional compensation may be paid on any basis including flat sum, bonus payment, straight-time hourly amount, time and one-half, or any other basis, and may include paid time off.

Computing compensation

An exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned.

The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily, or shift rate for the employee’s normal scheduled workweek. Thus, for example, if the weekly salary level is $921, an exempt employee guaranteed compensation of at least $1,000 for any week in which the employee performs any work, and who normally works four or five shifts each week, may be paid $300 per shift without violating the salary basis requirement.

The reasonable relationship requirement applies only if the employee’s pay is computed on an hourly, daily, or shift basis. It does not apply, for example, to an exempt store manager paid a guaranteed salary per week that exceeds the current salary level who also receives a commission of one-half percent of all sales in the store or five percent of the store’s profits, which in some weeks may total as much as, or even more than, the guaranteed salary.

Tips for employers

Most employers will be affected by the changes to the FLSA regulations. In addition, most business establishments will incur costs from the changes. What types of costs are we talking about? Some costs will be one-time implementation costs and other costs will be ongoing for an indefinite period of time.

• Devoting time to reading and understanding the proposed and final regulations
• Updating corporate overtime policies to comply with the FLSA changes
• Establishing communication between employers and employees about the benefits of qualifying as an exempt or nonexempt employee
• Reviewing job categories and job descriptions to classify them as either exempt or nonexempt
• Paying overtime to those employees who exceeded the current salary threshold of $455 per week, but will fall below the new salary level
• Increasing the salaries of certain employee groups to raise them above the salary threshold to classify them as exempt
• Facing lawsuits by employees who claim they qualify for overtime under the FLSA

To help ensure that your company will not be subject to an FLSA claim or a DOL audit, conduct an internal audit. Review job descriptions to determine whether they are still accurate, reflect the jobs being performed, and reflect the skills necessary to perform the job. Determine which employees exceed the current salary threshold of $455 per week, but will fall below the new salary level.

Do you have the required posters hung in the appropriate places in the workplace? That is an easy violation for DOL investigators to spot right when they walk through the doors of your company.

Make sure you have properly calculated overtime for nonexempt employees. And pay past overtime due to employees you have misclassified. Paying them now will be far less expensive than paying them in a DOL settlement or class action lawsuit.

Use BLR's new Overtime Rules Calculator to determine how the proposed changes will affect your organization's payroll budget.