The Fair Labor Standards Act of 1938 sets the standards for overtime pay and the basic minimum wage. Back in April, we wrote a popular blog post that looked at the Department of Labor’s (DOL) proposed changes to this Act.
We spoke about how important it is for small business owners to be aware of these changes because they will not have much time between when the changes are announced and when they take effect (December 1, 2016) to ensure that their business practices are compliant. Since that blog post, the rules have been finalized.
When the Final Rule takes effect, the “standard” salary level will more than double. It will increase from $455 per week for full-time salaried employees to $913 per week or $47,476 annually. In addition, the new exemption for highly compensated employees will increase to $134,004 per annum, up from $100,000. These levels will update every three years, beginning on January 1, 2020, in order to maintain the earnings percentiles laid out under the Final Rule.
Aside from understanding the impact of the new salary exemption levels, small business owners must also be aware of how bonuses are handled under the new FLSA changes.
Discretionary versus Non-Discretionary Bonuses
According to the DOL, non-discretionary bonuses include “those that are announced to employees to encourage them to work more steadily, rapidly or efficiently, and bonuses designed to encourage employees to remain with a facility.”
Non-discretionary bonuses are pre-specified and calculated based on a fixed formula such as commission payments. On the other hand, as the name suggests, discretionary bonuses are subjective and are not in line with any previously announced criteria.
Small business owners may be able to benefit from the Final Rule that will permit them to use non-discretionary bonuses to satisfy up to 10% of the new standard salary level – providing that they pay bonuses quarterly or on a more frequent schedule. This is an especially important caveat for those who wish to increase the salary threshold for employees and not have to worry about overtime pay.
It is, however, important to note that that the DOL does not permit the use of non-discretionary bonuses and incentive payments to meet the salary exemption level for highly compensated employees (HCE).
If an employee does not earn enough in non-discretionary bonuses and incentive payments in a given quarter to maintain their salary exemption – the DOL permits a “catch-up” payment at the end of the quarter. The employer is given one pay period to account up for the shortfall (up to 10 percent of the standard salary level for the preceding 13-week period).
- Visit the Department of Labor’s website to get answers to Frequently Asked Questions and to view informational webinars.
- Review your compensation and bonus plans to ensure that the language is clear and properly distinguishes between discretionary and non-discretionary payments.
Check out our latest podcast episode in which Host, Adam Rondo, interviews Jacob Stebbins, ADP Client Channel Specialist and Mark Kilduff, founder of Remote Quality Bookkeeping. They discuss this new law and the fact that wage and hour lawsuits are up 456% since 1995. Listen to learn more about the new FLSA overtime law and how to avoid a lawsuit.